1. Security of Supply Brian Withington, Managing Director, TPA Solutions GTE Conference, 22 October 2003

2. www.tpasolutions.co.uk Overview of presentation Dimensions of security of supply GTE perspectives –January 2003 paper –March 2003 comments on EU draft directive Personal perspectives Conclusions

3. www.tpasolutions.co.uk What do we mean by “security of supply”?

4. www.tpasolutions.co.uk Security of Supply Dimensions Access to sources of gas - long term contracts - liquid spot markets Adequacy of transportation capacity - average & peak conditions - flexibility & resilience Insurance capability against supply shocks & severe demand conditions - role of “strategic” storage

5. www.tpasolutions.co.uk Some GTE perspectives

6. www.tpasolutions.co.uk GTE Paper - Jan 2003 Roles & responsibilities in a liberalised market Investment in transportation infrastructure Resilience of gas networks Operational integrity & balancing

7. www.tpasolutions.co.uk Roles & Responsibilities Producers & suppliers to provide sufficient gas TSOs to provide sufficient transportation capacity, but shippers to balance individually TSOs maintain system integrity, but shippers/suppliers need to balance

8. www.tpasolutions.co.uk Transportation investment Predictable, transparent & stable framework needed Reward for investment by TSOs Importance of long term contracts Market driven wherever possible

9. www.tpasolutions.co.uk Network resilience Low probability events Reliability of market signals? Risk of underbooking by shippers Funding “insurance” investment Short termism versus long lead times Differentiating security levels? TSOs face planning, investment & stranding risks

10. www.tpasolutions.co.uk Operational integrity Primarily TSO responsibility, but: –Shippers should not rely on TSO to balance their own portfolio Need for adequate shipper incentives to balance Mechanism for handling shipper bankruptcy

11. www.tpasolutions.co.uk GTE Recommendations Transparent national frameworks –Minimum output standards –Contractual signals from shippers Healthy network investment climate –Adequate rewards for TSOs –Long term contracts Incentives for system integrity –Emergency arrangements –Supplier bankruptcy Foster dialogue with non EU producers –E.g. Energy Charter Treaty

12. www.tpasolutions.co.uk GTE comments on Draft SoS Directive Harmonised output standards may not be appropriate Market forces should determine the means of meeting standards Opposed to minimum storage obligations for TSOs No need for centralised EU crisis mechanism

13. www.tpasolutions.co.uk Further GTE comments Cost recovery –Obligations must be funded Exemption for new entrants –May cause uncertainty & distortions “Protected customer” category –Too broad, needs clarification Concept of single largest gas supply country –Needs amendment Long term contracts –Duration >> 1 year –Level should not be prescribed

14. www.tpasolutions.co.uk Personal perspectives (confessions of an ex-transporter)

15. www.tpasolutions.co.uk UK Approach Security of supply was a neglected concept at time of liberalisation –Blind faith in “market forces” –Suspicion of British Gas motives Attitudes changing more recently –Failures in other industries –EU debate –Gas failure = Electricity failure

16. www.tpasolutions.co.uk Security of Supply Triangle Resilience Diversity Insurance Sources of Gas TransportationStorage

17. www.tpasolutions.co.uk Sources of supply Europe has access to ample sources of gas - Norway, Russia, UKCS, Caspian, N Africa Import dependency is growing but manageable So no fundamental problem, but consider: - Producer willingness to invest against spot price versus long term indexed contracts - Concentration of producer power

18. www.tpasolutions.co.uk Transportation Capacity Transport capacity facilitates diverse supplies Increasing interdependence of networks in EU Adequate capacity in any one state does not guarantee its supplies How do we avoid the “weakest link” in the chain? Adopt minimum network capacity and resilience standards throughout EU

19. www.tpasolutions.co.uk 1. Rely exclusively on market - Suppliers decide all storage needs 2. Market forces plus “top up” - Agency complements supplier bookings 3. Allocate storage to suppliers - Based on defined security obligations 4. Allocate storage via end customers - Suppliers pay based on customer portfolio Storage insurance options

20. www.tpasolutions.co.uk Why not rely solely on the market? May work well for larger customers,but: Gas supply has “public good” characteristics Risk of “moral hazard” behaviour Inability to differentiate security service between neighbours on the network Market cannot fully value insurance for most customers

21. www.tpasolutions.co.uk Top Up concept Oct Nov Dec Jan Feb Mar Apr Inventory level Physical stock level Intervention Monitor level

22. www.tpasolutions.co.uk Who pays for Top Up? Booked & Paid For Avoided cost Top up Premium Booked & Paid For Suppliers A&B have identical customer base A “takes a chance” B books in full B subsidises A A can grow market share! Top Up premium Supplier ASupplier B

23. www.tpasolutions.co.uk Supplier Inventory Obligation Based on size and nature of supplier’s portfolio - may be tied to level of imports Options available to supplier : - demand management - domestic physical storage - physical storage elsewhere in EU - “virtual storage” Storage can be competitively provided Parallels with oil industry

24. www.tpasolutions.co.uk Storage allocation via the end user The core/non-core philosophy … Mandated storage provision for core market –Residential & smaller I&C –Common security standard –Storage & pipeline capacity “bundled” Non-core market exercises full choice –Large industrial & power stations –“Get what you pay for”

25. www.tpasolutions.co.uk Core/Non-core issues Boundary between core & non-core markets How much storage should be mandated? –Let the market work as much as possible Transporter’s role – how much discretion? –Use of algorithms & rules Ownership of storage –Vested interest if transporter owned? –Separate ownership – OK, but needs consistent regime for investment

26. www.tpasolutions.co.uk Underpinning the Market Output Standards Secure Funding Shared Obligations Diverse supplies Customer Choice Competition Infrastructure Investment Public Policy and Regulatory Framework

27. www.tpasolutions.co.uk Security of Supply “The Middle Way” Let the market decide level as well as deliver Public policy goals Market delivery Central planning Strategic Reserves Market intervention “Hope for the best”“Isn’t this better?”“We know best”

28. www.tpasolutions.co.uk Conclusions Liberalisation & security of supply are compatible but not inevitable Need adequate infrastructure investment to enable secure and diverse supplies of gas Establish public policy and regulatory frameworks that incentivise this investment Facilitate supply competition and operation of market forces within these frameworks

29. www.tpasolutions.co.uk