Walter Boltz Chairman, CEER Gas Working Group Enabling Markets Initial assessment of merging market areas & trading regions Gas Target Model Walter Boltz Chairman, CEER Gas Working Group

Internal EU gas market What do we want to achieve? How we want to achieve this? First we need to enable functioning wholesale markets (“markets”), where they do not exist yet. As second step we need to connect these markets better to move forward to an integrated market. Basic conditions need to be established in all countries No one size fits all solution possible

Overview of the MECO-S model for EU gas market integration Pillar 1: Enable functioning wholesale markets Pillar 2: Tightly connect markets Pillar 3: Enable secure supply patterns Improve effectiveness by realising economic pipeline investments Pillar 1: Structuring network access to the European gas grid in a way that enables functioning wholesale markets so that every European final customer is easily accessible from such a market. Pillar 2: Fostering short and mid-term price alignment between the functioning wholesale markets by tightly connecting the markets through facilitating cross-market supply and trading and potentially implementing market coupling as far as the (at any time) given infrastructure allows. Pillar 3: Enabling the establishment of secure supply patterns to the functioning wholesale markets. Foundation: Improving the effectiveness of pillars 1 to 3 by making sure that economic investments in pipelines are realised.

Where do we have functioning wholesale markets yet? Depending on the definition applied between 1 and 5 functioning gas markets exist in Europe today! Shall we strive to create 25 functioning gas markets? Will this foster competition in the retail markets? Would the German gas market have developed the same if we had not reduced the number of zones (~20) by merging them? Would the French gas market have developed the same if we had not reduced the number of zones (5) by merging them? Can markets be enabled without liquidity only via better connection?

How to enable functioning wholesale markets? Different pictures all over Europe call for different approaches which are not mutually exclusive If a country is capable of establishing a functioning market itself the establishment of one (or two, based on C/B analysis) zone within this country is important (e.g. GB, Germany, France, Spain); If a country is not capable of establishing a functioning market itself (e.g. due to lack of liquidity or size) Cross-border market areas (full merger) is one solution; or Accession to a larger, already functioning market; or Trading Regions – a single cross-border zone for wholesale markets with congestion-free interconnection to national end-user zones. The trading region model might thus be the model of choice for e.g. the 3 Baltic States, as well as for MS in Central and Eastern Europe.

Cross-border market area The Market Area Model Features: One virtual point for wholesale trading Fully integrated wholesale market One balancing zone from import points to final customers Full integration of DSO networks Single set of balancing rules Single balancing entity Country A Market Area A National market area VP Final customers (A) Country A Country B Market Area AB Vertical integration of wholesale and distribution level. Market areas (at national level) might be considered the model of choice for larger countries, which are capable of creating a market within their own borders (e.g. GB, Germany, France, Spain, Italy, ...) However: Creating cross-border market areas (that span more than one country) requires substantial legal alignment between the participating countries. Cross-border market area VP Symbols Virtual point of the market area serving as the sole marketplace of the market area Entry or exit contract Exit contract VP Final customers (A) Final customers (B)

The Trading Region Model Features: One virtual point for wholesale trading Fully integrated wholesale market Trading region is basically kept free of imbalances Final customers are balanced in national end user zones that may reflect national specifics End-user balancing may be done by national balancing entity Congestion-free interconnection between trading region and end user zones through the common virtual point ( virtual exit to end user zone) Country A Country B Trading Region AB VP End user zone A End user zone B Final customers (A) Final customers (B) Wholesale levels in two (or more) countries are integrated Reduces requirements of legal coordination Common zone End-users are balanced in their own country Trading regions do not preclude a later market area merger Legend and Symbols End user zone = National balancing zone for national final customers, no matter the system (distribution or transmission) they are connected to Trading Region AB = Cross-border entry/exit system including all nominated points on the transmission systems of countries A and B Entry or exit contract Exit contract Virtual 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

What needs to be done in all approaches? Prerequisite for merging market areas and creating trading regions: Absence or at least limited physical congestion As soon as we are talking about cross-border integration the following issues have to be analysed Entry / Exit Tariffication Redistribution of revenues and costs Alignment of regulatory framework Investments TSO as well as NRA cooperation

MECO-S Model: Architecture at Large Country E Country F Trading Region EF End user zone E End user zone F Country C Country D Market Area CD Market Area A Country A Market Area B Country B VP Legend and Symbols Hub to Hub capacity product and potentially market coupling Virtual point. VP

Common position of European gas industry associations on multi-system operation of TSOs

The second step: connecting markets Connecting markets means price alignment between functioning markets and thereby driving market efficiency and public welfare on a European scale Connecting markets can happen at different timescales, e.g. short-term implicit auctions.

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