Presentation on theme: "Jean-Michel Glachant & Sergio Ascari Florence School of Regulation"— Presentation transcript:
1A TARGET MODEL FOR THE EUROPEAN NATURAL GAS MARKET *** Preliminary Outline Jean-Michel Glachant & Sergio AscariFlorence School of RegulationEuropean Energy Regulators' 2nd Workshop on Target Model for the European Gas MarketBonn, 22 February 2011
2THE EUROPEAN GAS TARGET MODEL A research project developed byFlorence School of RegulationClingendael International Energy ProgrammeWagner, Elbling & Co.with support from:E-Control, GmbhBundesnetzagenturNet4Gas
4MARKET ARCHITECTURE: OVERVIEW Multiple market zonesTM will not define how many / which zonesMergers to be encouraged as larger zones would increase market competition and supply securityZones may merge if economically reasonableToo large zones (like a single EU zone) would entail unacceptable cross subsidiesZones must be market capableArchitecture fully consistent with regional approach recommended by Security of Supply Regulation (No. 994/2010)
5Market Enabling and Connecting THE MECO MODEL (1)The MECO model is a proposal for the European Gas Target ModelMECO is an acronym for:Market Enabling and ConnectingThe model focuses primarily on issues that can be addressed in framework guidelines and the ENTSOG network codeThe status of the model is preliminary
6OVERVIEW OF THE MECO MODEL FOR EUROPEAN GAS MARKET INTEGRATION Pillar 1: Enable functioning wholesale marketsMECO ModelPillar 2: Tightly connect functioning wholesale marketsPillar 1: Structuring of the European gas grid in a way that enables functioning wholesale markets, so that every European end-user is served by such a market.Pillar 2: Connection of the resulting functioning wholesale markets by significantly facilitating cross-market trading especially in the forward markets and implementing market coupling of day ahead markets to align market prices as closely as the given infrastructure allows.
7DEFINITION OF “FUNCTIONING WHOLESALE MARKETS” A functioning wholesale gas market is:a single price zoneaccessible to incumbents and new entrants on equal termswhere trading is liquid - vivid and resilient at the same timeit creates reliable price signals in the forward and spot marketsno trade - even if substantial - shall distort the market price
8MECO PILLAR 1: ENABLE FUNCTIONING WHOLESALE MARKETS Functioning wholesale markets are essential for:Fostering retail competitionEfficient use of gas assets (procurement contracts, storage, etc.)Functioning wholesale markets can not be replaced by tightly connected non-functioning markets. The effects on retail competition and market efficiency would never by the same.The MECO model creates structural conditions that enable the emergence of functioning markets by arranging price (entry/exit) zones that are:Large enough to be interesting for a substantial number of wholesalersWell connected to other markets
9ARCHITECTURES TO ENABLE FUNCTIONING MARKETS In order to create the structural conditions for the emergence of functioning markets, the following alternative architectures are foreseen in the MECO model:Market Areasi.e. a single price (entry/exit) and balancing zone from the import points to the end-users, either structured as:National market areas (if functioning wholesale markets can be achieved stand alone); orCross-border market areas (if cross-border cooperation is required to achieve functioning markets)Trading Regionsi.e. a single cross-border price (entry/exit) and balancing zone for wholesale markets with congestion-free interconnection to national end-user zones.
10Cross-border market area THE MARKET AREA MODELMarket Area ACountry ATransmission systemsDistribution systemsFeatures:One virtual point for tradingFully integrated wholesale marketOne balancing zone from import points to end-usersSingle balancing entitySingle set of balancing rulesVPNational market areaExCountry ACountry BLegend and SymbolsEx Interconnection capacity between transmission and distribution systems in the market area (not bookable by shippers)IC Cross-border interconnection capacity in the market area (not bookable by shippers)Virtual point of the market area serving as the sole marketplace of the market areaMarket Area ABVPCross-border market areaTransmission systemsTransmission systemsICExExDistribution systemsDistribution systemsVP
11THE TRADING REGION MODEL Features:One virtual point for tradingFully integrated wholesale marketEnd-users are balanced in national end-user zones that may reflect national specificsEnd-user balancing may be done by national balancing entityCongestion-free interconnection between trading region and end-user zones through the common virtual pointCountry ACountry BTrading Region ABEnd-user zone AEnd-user zone BVPLegend and SymbolsTrading Region AB = Cross-border entry/exit system including all nominated points on the transmission systems of countries A and BEnd-user zone = National balancing zone for national end-users, no matter the system (distribution or transmission) they are connected toVirtual 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
12MECO PILLAR 2: TIGHTLY CONNECT FUNCTIONING WHOLESALE MARKETS Tight connection between functioning wholesale markets is essential for:price alignment between adjoining markets, thereby driving market efficiency and public welfare on a European scaleimproving market liquidity and increase competition, reducing market dominance in each & joint marketsenhance interconnecting infrastructure where necessary and economically justifiedThe MECO model foresees a number of measures in order to connect markets, differentiated by time horizon
13CONNECTING THE ZONES (1) Sell long term capacity by rolling auction / open seasonsbundled across transmission systemscoordinated across adjacent transmission systems and along routesinvest to increase capacity if market willing to pay for itSell at least 10% of total capacity on short term basis by auctionsbundled, coordinatedyearly, monthly and intermediate products to be availableenforce commercial / physical reverse flowscap LT (>5 years) capacity contracts to 75%
14CONNECTING THE ZONES (2) Implement strict congestion management procedureprocess already under wayAny firm capacity available / released after the CM procedure is transferred to DA marketsDA capacity may be directly auctioned off or transferred to gas exchanges for an implicit auction (volume or price coupling, market splitting)Any unused capacity left from DA may be allocated intra-day (1st come 1st serve)
15METHODS FOR CONNECTING MARKETS IN THE MECO MODEL Connection by …Time horizonOpen Seasons, Cross-market trading furthered by Enhanced Trading ConditionsLong term marketMid term marketCross-market trading furthered by ETCShort term marketDay ahead marketMarket CouplingIntra-day market1st come 1st serve, furthered by ETC
16ENHANCED TRADING CONDITIONS Enhanced trading conditions (ETC) are a package of measures to be implemented foremost in the ENTSOG network code in the areas ofCAM/CMP (e.g. VP2VP-products, coordinated auctions for longer term capacities, FCFS for the intra-day market, harmonized contract start dates, standards for secondary capacity trading…)Nomination and Balancing (e.g. common gas day, harmonized nomination schedules, limits on renomination, …)Tariffs (e.g. harmonized date for change of tariffs, structure methodology, inter-TSO compensations within zones)Gas quality (in order to enable bidirectional flow at all border points)Gas year sessions (co-ordinated LT auctions / open seasons, short term capacity auctions, seasonal storage booking)The details of the ETC package are still under development.
17DAY AHEAD MARKET COUPLING VPVPICAdjoining day ahead spot markets (organised as exchanges operating on the virtual point) are connected by an administrative process in the course of which gas is bought in the cheaper market and sold in the pricier market, with the goal of price alignment and within the capacity limits of the interconnection capacity available to the market coupling process.Market Coupling may involve several member states at once.Legend and SymbolsIC Interconnection capacity between marketsVirtual point of the marketVP
18THE ROLE OF MARKET COUPLING Not a general model, but an option limited to daily capacity allocationMost trading likely to remain based on long term contracts, with increasing role of short termMore benefits from MC expected in power markets, where congestion issues are commonMarket coupling untested in natural gasGeneralised usage unlikely for several years, no meaningful target datesMC usage a valuable goal, as it leads to optimal capacity allocation and price alignment whenever justifiedMC to be allowed and encouraged
19MECO MODEL: ARCHITECTURE AT LARGE Country CCountry DMarket Area CDVPCountry AMarket Area AVPCountry ECountry FTrading Region ABVPCountry BEnd-user zone EEnd-user zone FMarket Area BVPLegend and SymbolsVirtual pointConnection between markets (facilitated by enhanced trading conditions and day ahead market coupling)VP
20PART 2 GAS TARGET MODEL VISION, GOALS, CONSTRAINTS, CRITERIA AND NEXT STEPS
21WORKING METHOD Top-down approach Outlining: political goalslegal constraintsproblems to be solvedCriteria for successProviding a target model vision (architecture)Outlining its main consequences for integration areas (Capacity Allocation, Congestion Management, Balancing, Tariffs, Investment, Interoperability, Operational Procedures)Exploring links and relationships between the areas
22POLITICAL GOALS OF THE GTM Sourced from legislation recitals, official documents:to establish an internal market in natural gasto remove restrictions on cross border tradeto ultimately achieve efficiency gainsto promote competitive pricesto contribute to security of supply and sustainabilityto ensure that Europe remains an attractive outlet for external suppliesto foster market integrationto reach an appropriate level of cross-border gas interconnections capacity
23LEGAL CONSTRAINTS Entry-exit systems required Cost-reflective tariffs providing incentives to invest or value-reflective auctionsEndeavour to harmonize balancing regimes, streamline structure & level of balancing chargesPromote coordinated allocation of cross border capacityMandatory market based CA/CMImplicit auctioning explicitly allowed for short term allocation
24OUTSTANDING PROBLEMS Uneven, un-coordinated capacity access allocation Ineffective congestion managementLow transparency and no harmonization of entry- exit tariff setting criteriaLimited coordination of operational procedures, lacking IPAs/OBAsLack of open season co-ordination and decision criteriaUneven status of hubs, exchanges and their liquidityReduced market competition, as problems are solved by horizontal & vertical company integrationReduced investment, security of supply
25CRITERIA FOR SUCCESSPrice convergence, after allowing for marginal transmission costshitherto achieved only in NW EuropeLiquidity: ability to buy and sell at market prices, from exchanges or long term contractssatisfactory only in British NBPAbility to reserve capacity for valuable trade in the short term and to reserve / expand capacity in the long term, including new infrastructure developmentuneven, fragmented, no level playing field
26MECO MODEL: BENEFITS Once the MECO Model is implemented: All European end-users will be served by a functioning wholesale market.These functioning wholesales markets will act as enablers and fertilizers for retail competition because they provide easy access to competitively priced gas and are the basis for proper risk management.Prices between these wholesale markets will be aligned as much as possibleThis will maximize efficiency and thereby public welfare in / from trading on a European scale by making sure that all gas assets (procurement contracts, storage, …) are used in the most economic manner.
27MECO MODEL: OPEN ISSUES The research team is still working on a number of open issues including:Integrating security of supply considerationsNew infrastructureWithin day marketsThe role of storage in the modelThe role of LNG in the modelBalancing requirementsTariffsOperational proceduresInteroperability
28STORAGE & LNG TERMINALS: EVOLUTIONARY VIEW Storage facilities and LNG terminals are no natural monopoliesNegotiated access and TPA exemptions common in EU Member StatesEssential facility doctrine, factual monopoly led to regulated TPE in several MSMarket integration likely to reduce monopoly power of remaining regulated facilitiesPhasing-out of regulation to be foreseen as criteria for markets integration are me
29NEXT STEPS Some more detailed description of the Target Model Addressing the main harmonisation areasExploring links between areasOutlining further monitoring requirementDiscuss implementation steps and requirements