Market Coupling PEG Nord / PEG Sud South Gas Regional Initiative 11 th July 2011 Madrid

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

Spread difference vs. regulated tariff Regulated tariff is higher than the spread value

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 EXPERIMENTATION PEG 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 objective In 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 platform 2.Through a blind auction of gas molecule, combined with implicit allocation of capacities 3.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 25 th May 2011)

Example of an order book without spread products Products to be marketed

Example of spread products Products to be marketed Implicit need to buy a MWh gas flow from North to South at 0,050€/MWh

Products to be marketed Example of spread products Implicit need to sell a 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 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 Proposal to buy a 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 1 st 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 JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptember 2011 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