1. Gas Regional Initiative North West Region - Gas Target Model - BNetzA/Ofgem Pre-Comitology Meeting Bonn – 26 May 2011

2. 2 Pre-Comitology Meeting Bonn – 26 May 2011 Introduction The Target Model (Madrid Conclusions) should:  provide support for FG and NC development to reach 2014 goal for completing the internal market  guidance also for Commission´s guidelines and Regional Initiative / Int. Projects  Internal market means: real choice, more cross-border trade, competitive prices…  provide an outlook on the EU gas market beyond that date  Starting Point is problems the gas market faces

3. 3 Pre-Comitology Meeting Bonn – 26 May 2011 Status of Project  Series of public workshops  Vienna (December 3rd 2010)  Bonn (February 22nd 2011)  London (April 11th 2011)  Brussels (June 28th 2011)  Stakeholder roundtables  Input from two external studies  LECG  Florence School of Regulation in co-operation with the Clingendael Energy Programme and Wagner, Elbling & Co.  MECO-S Model  CEER Paper is currently being drafted  Final draft version to be presented at 4th workshop in Brussels

4. 4 Pre-Comitology Meeting Bonn – 26 May 2011 Setting the scene ? Challenges:  Internal market by 2014  Competition  EU 20-20-20, integration of RES  more CCGT’s?  Power to Gas?  Security of Supply  N-1, Reverse Flow, access to diff. supply sources  less domestic gas production  more transit, new investment LNG

5. 5 Pre-Comitology Meeting Bonn – 26 May 2011 Problem Identification  3 rd Package makes Entry-Exit systems obligatory:  Large Entry-Exit Systems may reduce firm capacity -Internal congestion may lead to cross-subsidisation  Small Entry-Exit systems are not market capable -problem of “pan-caking” for long-distance transport  For gas to flow where it is needed (price signal) there needs to be available capacity  Contractual Congestion identified as a major problem, but not for all IPs  Recital 21: “There is substantial contractual congestion in the gas networks.”  Definition: "contractual congestion" means a situation where the level of firm capacity demand exceeds the technical capacity, Art. 2(21) Reg. 715/2009  Commission proposal on Congestion Management

6. 6 Pre-Comitology Meeting Bonn – 26 May 2011 Status of market integration in the NW region  Significant indigenous gas production, but increasingly import dependent  Decoupled entry-exit zones implemented in almost every country  NBP most liquid hub (churn rate:14-15), Zeebrugge (4-6), TTF (3-4), NCG (2-3) Gaspool (2-2,5), PEG Nord (1,5), trading volumes increasing  Increasing price convergence but still price differences  Significant infrastructure investments of European dimension (e.g. Northstream) Source: European Commission

7. 7 Pre-Comitology Meeting Bonn – 26 May 2011 Overview of high level options Enable Markets: Connecting markets: Market areas (sub-) national or cross-border Full vertical integration Merging of market areas Taking physical connection into account Trading region Merger of entry-exit systems Taking physical connection into account Seperate end-user zones with national balancing system Bundling of capacity Harmonisation of products, Gas-day Explicit Auctions Make capacity available via UIOLI and/or Overbooking Market coupling Day-ahead implicit auctions/allocation as possible element to be tested in pilots first LECG + MECO-S only MECO-S LECG + MECO-S MECO-S & LECG Improve effectiveness by realising economic pipeline investments

8. 8 Pre-Comitology Meeting Bonn – 26 May 2011 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.

9. 9 Pre-Comitology Meeting Bonn – 26 May 2011 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 Symbols Virtual point of the market area serving as the sole marketplace of the market area Entry or exit contract Exit contract Market Area A Country A Country B Market Area AB Cross- border market area National market area VP Final customers (A)Final customers (B) VP Final customers (A) VP

10. 10 Pre-Comitology Meeting Bonn – 26 May 2011 The Trading Region Model Country ACountry B Trading Region AB End user zone A End user zone B Final customers (A)Final customers (B) VP 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 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)

11. 11 Pre-Comitology Meeting Bonn – 26 May 2011 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

12. 12 Pre-Comitology Meeting Bonn – 26 May 2011 How to connect markets? Option 1  Option 1 : Explicit capacity allocation with continuous trading Example for “overselling”: -Shipper A books 100 units of capacity -Shipper A nominates 50 units -TSO assumes that shipper A will not use remaining 50 units, TSO sells them day- ahead -Shipper B buys remaining 50 units off TSO -Shipper A has paid for 100, but only used 50 units  Capacity hoarding is a bad deal!  TSO takes a risk and needs appropriate incentives  Explicit auctions (CAM FG)  Bundled Products  No gate closure, no restriction of renomination rights  Overselling  Interruptible Use It Or Lose It  All capacity is financially firm (not necessarily physically firm) Has been effective in GB, but requires NRAs to set appropriate incentives

13. 13 Pre-Comitology Meeting Bonn – 26 May 2011  Option 2: Explicit capacity allocation with gate closure How to connect markets? Option 2 Gas trading would shift to where auction takes place, but can be adapted to allow for renomination during the gas day Example of Gate Closure with firm UIOLI or UIOSI - Shipper A has 100 units in long-term contract -Shipper A nominates 50 units, it loses or is paid for the remaining 50 units (or a proportion thereof) -TSO sells shipper A’s remaining 50 units (or a proportion thereof) in day-ahead auction on a firm basis - Shipper B buys the 50 units, nominates only 20, so loses the remainder intraday - If shipper A wants to increase its nomination, it buys additional capacity intraday Intra-day shipper trading Long-term market (explicit capacity allocation) Nomination Firm day-ahead auction of any capacity that was not nominated (Use It Or Sell It) Use it or lose it: unused capacity is sold through auction or FCFS Gas day

14. 14 Pre-Comitology Meeting Bonn – 26 May 2011 More efficient than explicit capacity auctions as it removes risk of separate transactions and allows markets to merge where no physical congestion How to connect markets? Option 3  Option 3: implicit auctions

15. 15 Pre-Comitology Meeting Bonn – 26 May 2011  Option 4: implicit, continuous  Can be used FCFS or implicit auctions  FCFS day-ahead not compatible with CAM FGs?  Series of implicit auctions may disperse liquidity but more auctions allow for flexibility  Arbitrages realised by the TSO from low price area to high price area with implicit allocation of capacity valued at the day-ahead price spread (GRTgaz- Powernext market coupling work) How to connect markets? Option 4 Continuous implicit allocation may be a solution to allow for efficient gas flows while keeping the flexibility provided by continuous trading? Day-ahead/ intra-day Long-term market (explicit capacity allocation) Auction gate closures Implicit allocation

16. 16 Pre-Comitology Meeting Bonn – 26 May 2011 Further issues: Interaction with long-term gas trading (1/2)  If short term capacity is freed-up, what should be the reserve price?  Zero reserve price allows capacity to be re-allocated at 0 cost if there is no congestion  If congestion, auction price will rise above zero  Will a zero reserve price change shippers behaviour and move markets towards the short term?  In non-peak periods maybe more reliance on short term  Peak period: long-term capacity still needed Some markets have higher proportion of transit than others Congestion revenues No interconnection High level of interconnection capacity 0 High revenues Surplus inter- connection capacity Interconnection capacity

17. 17 Pre-Comitology Meeting Bonn – 26 May 2011 Further issues: Interaction with long-term gas trading (2/2) Options for reserve prices for short term capacity 1.No reserve price (solution in electricity) but in gas domestic tariffs subsidise transit flows? 2.Set a reserve price to recover costs- impact on price convergence at congested points? 3.Set a reserve price at non-congested points but not at congested 4.No reserve price at interconnection points but a ’membership fee’ at end-user exit points a.Flat rate b.Based on flows Need a redistribution mechanism

18. 18 Pre-Comitology Meeting Bonn – 26 May 2011 Thank You!