RWE Transportnetz Gas 04/28/2009PAGE 1 ERGEG Gas Regional Initiative NW Short-term Capacity Project (C1) Comments by TSOs regarding different models discussed within the core-group

RWE Transportnetz Gas 04/28/2009PAGE 2 Content 1.Introduction 2.Short-term calculation 3.Day-Ahead Over-Subscription 4.Limitation of renomination rights 5.Improvement of interruptible products 6.Secondary Market

RWE Transportnetz Gas 04/28/2009PAGE 3 Introduction >Core group TSOs are strongly committed to work together with regulators and stakeholders to establish new methods for CMP. >GRI NW gained some very positive experiences in using pilot projects for implementing new business models. >Nevertheless, some fundamental principles have to be in place to ensure any investment into these new practices: –Renewal of CMP should not commercially disadvantage TSOs. –Provision of new CMP should be rewarded, i.e. compensating the costs for implementing and operating CMP hedging the risks by well-designed incentive mechanisms –Involved parties need sufficient time for thorough consultation especially with regard to value redistribution between stakeholders. >Concepts only work as a whole, preconditions have to be met beforehand in total. >Work of STC project should focus on deeper analysis and development of solutions rather than implementing a pilot.

RWE Transportnetz Gas 04/28/2009PAGE 4 Short-term calculation 1/2 Description >Recurrent calculation of available capacity at entry and exit points in order to enlarge capacity at congested IPs temporarily Preconditions >Analysis of parameters which can be varied on a daily basis, in many cases changes of parameters of grid connection agreements necessary –Changes of those can only be carried out at IPs between grid operators. –Sufficient time needed to define limits of variation of parameters, communication processes and calculation process >Risk for TSOs will rise and flows will be less predictable which makes estimation of necessary flow commitments much more complex. Therefore, effective, predictable and reliable incentives for providing additional firm capacity are necessary. >Interruptible capacities might be affected. This has to be accepted. >Costs arising from increasing need of external balancing energy as result of reduced flexibility within the system have to be covered.

RWE Transportnetz Gas 04/28/2009PAGE 5 Pros & Cons +More firm capacity could possibly be offered at congested interconnection points (while reducing the usable interruptible capacity). Possibilities have to be analysed further regarding certain points. -No quick win due to high implementation effort -Generation of additional costs since TSOs have to guarantee that the recalculation of capacity will run reliably every day of the year -Modified flow patterns from new day-ahead capacities may lead to new bottlenecks in other parts of the grid  TSOs may be forced to buy additional flow commitments which leads to higher costs Short-term calculation 2/2

RWE Transportnetz Gas 04/28/2009PAGE 6 Day-Ahead Over-Subscription 1/2 Description >Maximising access to entry capacity by selling more capacity than technically available considering diversity of shipper flows and using tools to ensure that nominations and resulting flows are consistent with physical system-integrity Preconditions >Financial incentives to be created and costs incurred to be approved >Impacts on different regulative regimes to be considered, changes in regulatory frameworks necessary since risks are not covered in most countries >Decision of offering additional capacity through over-subscribing should stay with the TSO and will be the result of a complex risk analysis. >Extra capacity should not be expected all of the time. However, incentive mechanism will determine outcomes and can be used to “tease out” availability of capacity by providing the “carrot” allowing TSOs to undertake certain risks. >Buy-back mechanisms must be carefully designed. Demand of short-term capacity at certain IPs must be sufficiently high to compensate purchase of backup/buy-back products. >A diverse shipper structure at relevant IPs seems is necessary, risk of correlated strategic behaviour of shippers must be acknowledged.

RWE Transportnetz Gas 04/28/2009PAGE 7 Pros & Cons +More firm capacity can be offered at congested IPs. +Efficient use of capacity because of opportunity for increased utilisation +Additional revenues possible (to manage risks) as long as effective, predictable and reliable incentive scheme is provided +Alternative way to physical investments +Relatively quick implementation (no physical invest needed) +Incentive based approach to promote increased release of capacity without need for having very technically based capacity calculation -Interruptible products get less valuable (higher probability of interruption) -Legal problems are not fully overseen. -German § 9 (4) GasNZV 1) might hamper this concept. Day-Ahead Over-Subscription 2/2 1) If firm capacity gets available, TSOs have to offer this capacity to shippers, who have already booked interruptible capacity.

RWE Transportnetz Gas 04/28/2009PAGE 8 Limitation of renomination rights 1/2 Description >Limitation of renomination rights for shippers with long-term capacity leads to free firm day-ahead capacity in amount of difference between existing firm capacity and nomination plus remaining rights to rise nomination. Preconditions >Application of first gate closure in a strict manner (CBP) >Model only to be applied at agreed points with equal conditions in both grids >Existing contracts and renomination rights resulting from them have to be changed ex post (possible legal constraint). >Allowance to fully recover additional costs arising from an increasing need for balancing gas >Acceptance of impact on usability and value of interruptible capacity >Assurance that TSOs can recover costs of applying the system >It should be investigated further whether such a system will be used by shippers in practice and will lead to desired single European gas market, since TSOs have to put a lot of efforts and resources in changing the system.

RWE Transportnetz Gas 04/28/2009PAGE 9 Pros & Cons +Formerly unused capacity can be sold to new/other shippers on a firm day- ahead basis. It stipulates an integrated application of a firm UIOLI on a day ahead basis. +Simple model with clear and transparent conditions for TSOs and shippers -Demand of residual balancing energy could rise  higher prices of balancing services -Offers for balancing energy or flow commitments may be reduced. It may be necessary to limit number of points with new renomination rules to keep enough flexibility in the market. -Restricted selling windows for new day-ahead capacities of probably only one hour does not allow a high merit of service combined with a very high effort to initiate the daily capacity reallocation process. -Within-day products would need to be created and implemented. It is questionable if that is quickly feasible and if there is a market for within-day products.  The effect of a limitation of renomination rights is unclear. -Restriction of renomination rights could remove liquidity from the market. Limitation of renomination rights 2/2

RWE Transportnetz Gas 04/28/2009PAGE 10 Improvement of interruptible products 1/2 Description >Shipper often state, interruptible products are not very attractive because of unpredictable risk of interruption and relatively high prices. >In order to improve interruptible products and prove them to be a real alternative to firm short term products, several aspects have to be considered: –TSOs should consider new attractive price models for interruptible products. –Shippers should be in the position to estimate their risk of interruption by getting more information from TSOs. Rules for interruptions should be more transparent. –Shippers should be informed about forthcoming interruption as soon as possible. –There should be coordinated rules for interruptions between adjacent TSOs. Preconditions >Existing contracts need to be changed. >There has to be a congested situation.  Otherwise shippers could misuse this product to get “nearly firm” capacity for a cheaper price.

RWE Transportnetz Gas 04/28/2009PAGE 11 Pros & Cons +Smaller costs (in comparison to other models) +Risk remains with shippers (in comparison to firm short term products) and they are usually in a better position to hedge these risks. +Possible in current legal/regulatory framework +Drives secondary market (incentives for shippers to sell capacity on secondary market) +Quick win and possible within voluntary framework of GRI -A certain risk of interruption always remains. -For timely duly binding statements from TSOs about upcoming interruptions renomination rights have also be limited. Improvement of interruptible products 2/2

RWE Transportnetz Gas 04/28/2009PAGE 12 Secondary market Description >An efficiently functioning and liquid secondary market offers the right place for demand and offer to meet and value capacity at a market- based price. >Wherever there is a market demand, additional entry and exit points should be added to the day-ahead pilot. >New products could be implemented (e.g. week-ahead) and there might be ways to improve transparency especially regarding market demand. Pros & Cons +Quick-wins are possible, even within GRI NW, since a secondary market is compatible with current regulatory regimes. +This mechanism can be expected to be the most efficient way to ensure optimal use of capacity. +The implementation of this model invokes relatively low costs compared to other models.

RWE Transportnetz Gas 04/28/2009PAGE 13 Next steps / Way forward 1.Determine which of the five services is/are most promising and should be worked out in more detail 2.Work out the details of the selected service(s) 3.Determine benefits and draw-backs for network users based on the detailed designs and the relation between the different services 4.Determine feasibility of implementation by network users, TSOs and NRAs 5.Perform a cost/benefit analysis 6.Decide on the service(s) to implement

RWE Transportnetz Gas 04/28/2009PAGE 14 Thank you very much for your attention. Dr. Oliver Kasper