Gas Strategy Paper

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A EURELECTRIC Position paper

March 2012

The Union of the Electricity IndustryEURELECTRIC is the sector association representing the common interests of the electricity industry at pan-European level, plus its affiliates and associates on several other continents. In line with its mission, EURELECTRIC seeks to contribute to the competitiveness of the electricity industry, to provide effective representation for the industry in public affairs, and to promote the role of electricity both in the advancement of society and in helping provide solutions to the challenges of sustainable development. EURELECTRICs formal opinions, policy positions and reports are formulated in Working Groups, composed of experts from the electricity industry, supervised by five Committees. This structure of expertise ensures that EURELECTRICs published documents are based on high-quality input with up-to-date information.

For further information on EURELECTRIC activities, visit our website, which provides general information on the association and on policy issues relevant to the electricity industry; latest news of our activities; EURELECTRIC positions and statements; a publications catalogue listing EURELECTRIC reports; and information on our events and conferences.

EURELECTRIC pursues in all its activities the application of the following sustainable development values: Economic Development Growth, added-value, efficiency Environmental Leadership Commitment, innovation, pro-activeness Social Responsibility Transparency, ethics, accountability

Dpt lgal: D/2012/12.105/11

Gas Strategy Paper

-------------------------------------------------------------------------------------------------WG Gas to Power Stephen ROSE (GB), Chair Pablo ARGUELLES (ES), Gbor BRIGLOVICS (HU), Konstantinos CHRONIS (GR), Ccile DAVID (FR), Beat DEUBER (CH), Matthias DUEMPELMANN (DE), Sam EMMERECHTS (BE), Gerry HOGGAN (GB), Kosta KARTOVSKI (MK), Peter G. KRUSAA (DK), Ari LAINE (FI), Carlos MATA (PT), Zvonko PETAN (SI), Thomas PFLANZL (AT), Elisa RONDELLA (IT), , Derek RUSSELL (IE), Hein-Bert SCHURINK (NL), Aurimas STIKLIUNAS (LT), Alican TAKUNYACI (TR), David VIDUNA (CZ), Ion ZARNESCU (RO) Sbastien DOLIGE (EURELECTRIC Secretariat), Anne-Malorie GERON (EURELECTRIC Secretariat), Henning HAEDER (EURELECTRIC Secretariat), Giuseppe LORUBIO (EURELECTRIC Secretariat), Susanne NIES (EURELECTRIC Secretariat) Contact: Sbastien DOLIGE sdolige@eurelectric.org

EURELECTRIC Gas Strategy Paper

1. Introduction
Europes electricity system is undergoing profound changes. The EU has committed itself to a decarbonisation path that will see an 80 to 95 % reduction in its CO2 emissions by 2050. To reach this ambitious goal, the electricity sector will need to accomodate an increasing share of variable renewable energy sources in the generation portfolio. The electricity system will thus not only face volatile electricity demand, but will also increasingly experience the impact of intermittent generation. Natural gas - thanks to its comparatively low CO2 content and its promising use as back-up capacity for renewable generation has the potential to play a leading role in the EU energy mix and to help solve the challenge of stabilising electricity supply. In addition to liquid and integrated electricity markets through unconstrained price formation in the wholesale and retail markets, reinforced transmission and distribution grids, and active demand-side participation from customers, flexible and competitive gas markets can strongly contribute to a cost-efficient transition to a low-carbon economy. In February 2011, the European Council set the goal of completing European gas market liberalisation by 2014 which accelerated intense activity by the European Commission, the regulators and the TSOs on gas market design (Framework Guidelines, Network Codes and Target model). In this context EURELECTRICs WG Gas to Power has worked out a strategic plan from a gas buyers perspective to allow precise and timely communication of EURELECTRICs position in the upcoming consultations and more generally in its relations with relevant stakeholders. From our point of view, gas markets need to become more flexible so that gas-based generators can act more flexbily. This implies the completion of the internal gas market, as well as the necessary investments to enhance the flexibility of the physical system (e.g. interconnections, storage, LNG). The WG has: agreed on promoting the following three key objectives: - Availability of gas to meet the current and future demands of CCGT power stations - Ability to operate CCGT power stations flexibly without undue restriction - Ability to buy gas for CCGT power stations at a price reflective of the gas demand/supply fundamentals in the relevant markets highlighted a number of specific tasks for 2012 designed to advance these objectives.

2. Key Objectives
2.1. Availability As the first key objective, availability relates to the sufficient availability of gas to meet the current and future demands of CCGT power stations. EURELECTRIC has identified three main aspects to cover in order to reach this objective. Commodity EURELECTRIC is keen to maximise the potential gas available to supply power plants from conventional/unconventional sources and LNG, where economically and technically viable. To this end, fostering relations with multiple suppliers, both within and outside Europe, will not only increase security of supply but also competition on the European market. Additionally, we want to make sure that credible gas demand scenarios for power generation are available to policymakers. Infrastructure and capacity Gas infrastructure is a key aspect to address. EURELECTRIC seeks to strengthen the diversity of pipeline connections within and towards the EU to ensure that gas can flow where it is needed. Completing the missing links in the European Union should be a priority. Improvement in internal infrastructures has benefits in terms of security of supply as well as in terms of progressing to a single internal energy market. Implementing physical reverse flows as envisaged by the SOS Regulation should be done more systematically and at key interconnection points. Similarly putting in place a standard procedure for efficiently allocating incremental capacity is urgently needed to ensure that all reasonable demands for primary capacity are met when it is economic and efficient to do so. As a strong supporter of a fully liberalised and liquid European gas market, EURELECTRIC calls for mechanisms to ensure the interoperability of pipelines and the compatibility of LNG products at both regulated and exempted LNG plants, with hub products. Fair and efficient shipper/consumer access to capacity, including LNG, will be equally important. In that sense, we believe that gas capacity hoarding through long-term contracts should be prevented by defining appropriate congestion management procedures at all LNG plants. Gas market design Liquid national and regional hubs should be promoted in order to increase security of demand. To this end, we should aim to increase competition and oversight of the behaviour of dominant market incumbents in national gas markets as they could present obstacles to effective liberalisation. In addition, the introduction of consistent and light-touch licensing regimes will ease the access of new market players to liberalised markets.

2.2. Flexibility Flexibility refers to the ability of power generators to operate CCGT power stations flexibly without undue restriction. As a general strategy, to achieve the best possible level of flexibility, EURELECTRIC believes that a market design with a proper entry/exit system and virtual trading points (VTPs) should be implemented in all Member States, as stated in the Third Package. Three main topics should be addressed to achieve this objective. Balancing CCGT power stations can operate most flexibly within a framework of rules which do not overly penalise their fluctuating demand. EURELECTRIC therefore promotes the implementation of a daily balancing period with minimum within-day restrictions/penalties. A strong framework for market-based balancing should be put in place which incentivises network users to balance their portfolio while transmission system operators (TSOs) should only be responsible for residual balancing. In order to make the best use of linepack, EURELECTRIC advocates its use to collectively balance the system, rather than being sold as an ex-ante product. Finally, to maximise the flexibility for power generators to operate their CCGT power station and support the stability/liquidity of the market, we think that they should be allowed to re-sell gas at the hub and offer demand side responses on balancing platforms, including in neighbouring markets. Cross Border Pipeline & Storage capacity Another crucial element to achieve the flexibility needed by power generators is fair and efficient access to short-term capacity from cross border pipelines and long/short-term storage capacity where unsold or not being used. The ability to assign such capacity easily and quickly also helps in this regard. Available unsold capacity either side of an interconnection point which has not been bundled should be allocated on a bundled basis, while capacity hoarding should be prevented to avoid distorting the market. Further tools to promote flexible gas supply include virtual reverse flow at interconnection points and well-functioning secondary markets where capacity can be resold. Interoperability A European-wide integrated liberal gas market requires a number of effective measures to ensure the interoperability of the still fragmented markets. First and foremost, EURELECTRIC advocates the harmonisation of the gas day to synchronise the purchase of capacity and the balancing requirements. Equally important will be the harmonisation of accounting in energy units, which may otherwise be a barrier to moving gas from one entry/exit zone to another. Transportation nominations have been developed to support the flow of gas across interconnection points and other entry/exit points. However, as existing nomination processes may contribute to operational issues hampering the emergence of an efficient gas market, we would support standardised cross-border nomination times and renomination lead-times. Differences in gas quality and consequently differences in national specifications should not constitute a barrier to trade. We believe that TSOs are in the best position to manage the gas quality differences which need to be overcome to allow network users to trade without obstacles.

The same goes for ensuring the compatibility of an increasing amount of LNG products with hub products offered at VTPs. In addition, gas supply to the EU should not be rejected due to quality reasons otherwise not only security of supply but also trading and competition could be damaged within the EU. Finally, to ensure an optimal operational flexibility, EURELECTRIC supports the implementation of operational balancing agreements (OBA) at all cross border points.

2.3. Competitiveness In order to ensure the competitiveness of gas for power generation, CCGT power stations need to be able to buy gas at a price that reflects the gas demand/supply fundamentals in the relevant markets. This is linked to the supply of the commodity itself as well as to efficiency of infrastructure and capacity. Commodity Power generators need reliable and equitable relationships with their suppliers in order to compete on a level playing field. Fostering such relationships will therefore be integral to the work of EURELECTRIC. A further objective will be to ensure power generators can re-export or resell gas to reflect price differentials in neighbouring markets. Infrastructure and capacity Gas market regulation must ensure that equitable tariffs and terminal arrangements minimise flow distortions and restrictions. As a means to competitively adjust to changing price differentials, LNG buyers should be allowed to re-direct or re-load LNG cargos, should market circumstances require this. Finally, we strongly oppose non-market based security of gas supply measures and strategic gas storage, as they run counter to the market solutions envisioned for the future of the EU gas sector.

3. Annexes
3.1 Specific tasks in 2012

Availability
Commodity: Invite relevant speakers to meetings to discuss supply developments and attend EU Gas Coordination Group Meetings Liaise within EURELECTRIC to ensure credible CCGT demand scenarios

Infrastructure and capacity Participate in the development of TYNDP for 2013 Develop a position paper on incremental capacity and standard economic test / Respond to CEER GGPOS consultation and CEER discussions on incremental capacity Finalise response to ENTSOG CAM consultation Comment on CEERs LNG transparency template Liaise with other trade associations regarding fair and efficient access Respond to ACER consultation on Interoperability and harmonised tariff Framework Guidelines

Gas market design Respond to the further development of the Gas Target Model Meet with relevant stakeholders to discuss regional integration and coupling initiatives. Contribute to CEERs working on trading passport and EU wide licensing schemes

Flexibility
Balancing Participate in ENTSOG development of balancing network code (SJWS Balancing Meetings + Invite ENTSOG to Gas WG & respond to ENTSOG balancing consultation) Monitor regional cross-border balancing initiatives (invite CEGH to WG Meeting)

Cross Border Pipeline & Storage capacity Finalise response to ENTSOG CAM consultation Invite capacity platform provider (e.g. GATRAC, Trac-X) to a Gas WG meeting Prepare a briefing note of impact of CMP guidelines on CCGT operators Respond to CEER review of GPSSO for CAM and CMP Invite CEER to a Gas WG meeting

Interoperability Respond to ACER consultation on Interoperability Framework Guidelines

Participate in ENTSOG development of interoperability network code Invite ACER to a Gas WG meeting

Competitiveness
Commodity Develop a paper highlighting the current problems for CCGTs caused by indexation and resale restrictions Support gas target model development of hub-to-hub trading

Infrastructure and capacity Develop a position paper on tariffs Respond to ACER/DG Energy tariff harmonisation paper Attend EU Gas Coordination Group Meetings

3.2 Action tables

Strategic Objective

Work Area

Specific Requirements

Must Do

Specific Tasks

Key Responsible Party(s)

Commission Other Trade Associations (e.g. Eurogas, OGP) Eurelectrics EPG Workgroup

Priority in 2012 (1 to 3)

Sufficient availability of gas to meet the current and future demands of CCGT power stations

Supply Markets (Commodity)

Multiple suppliers Maximise the potential gas supply from: o indigenous sources o third countries o LNG o unconventio nal sources where commercially viable. Ensure gas demand for power generation is accurately represented

Support and monitor developments in: o indigenous natural gas and unconvent ional gas productio n in Europe o countries exporting natural gas, unconvent ional gas and LNG to Europe Monitor and assess available CCGT gas demand

Invite relevant speakers to meetings to discuss supply developments Liaise within Eurelectric to ensure credible CCGT demand scenarios

data

Cross Border Pipeline Capacity

Diversity in pipeline interconnection Fair and efficient access to available long term capacity to underpin commodity investment Standard procedure for efficiently allocating incremental capacity Congestion management arrangements which ensure longterm capacity is not hoarded Physical reverse flow capability where economically justified Interoperability of pipelines

Monitor and input into 10YNDP Promote efficient capacity auction mechanism for long term capacity in both directions Promote harmonised auction/OSP procedure for incremental capacity Promote standardised EU wide economic test for new pipeline investment Ensure bundling of new and available capacity TSOs to provide

Respond to ENTSOG CAM consultation Participate in the development of 10YNDP for 2013, as appropriate Respond to CEER GGPOS consultation Feed into CEER discussions on incremental capacity Participate in development of harmonised tariff Framework Guidelines Respond to ACER consultation on Interoperability Framework Guideline

ENTSOG CEER ACER

quality conversion and to harmonise maintenance

LNG

Gas Market Design

Fair and efficient access to available LNG capacity and entry capacity at LNG terminals Appropriate transparency Reasonable use-itor-lose-it arrangements for unused berthing slots Compatibility of LNG products with hub products Liquid national hubs Regional hubs to increase security of demand Reduce dominance of incumbents Consistent and light touch licensing

Highlight any concerns that may arise

Develop a position paper on incremental capacity and standard economic test Comment on CEERs LNG transparency template Liaise with other trade associations regarding fair and efficient access

CEER Other Trade Associations

Promote national entry/exit systems with virtual trading points Monitor regional hub initiatives under the Gas

Respond to the final version of the Gas Target Meet with relevant stakeholders to discuss regional integration and

Commission CEER EU TSOs Exchanges

regimes

Target model Support gas release and market maker initiatives to reduce dominance of incumbents in less developed markets Encourage regulatory best practice in gas licensing

coupling initiatives. Contribute to CEERs working on trading passport and EU wide licensing schemes

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Strategic Objective

Work Area

Specific Requirements

Must Do

Specific Tasks

Key Responsible Party(s)

ENTSOG

Priority in 2012 (1 to 3)

Ability to operate CCGTs flexibly without undue restriction Balancing

Daily balancing period Minimise within-day restrictions/ penalties Market based balancing incentives TSO residual balancing Right for CCGTs to re-sell gas at hub Opportunities for CCGTs to offer demand side response on balancing platforms, inc in neighbouring markets Linepack used to collectively balance the system not sold as an ex-ante product

Participate in ENTSOG development of Balancing Network Code Monitor and respond to any regional crossborder balancing initiatives, e.g. CEGH in the SSE GRI

Ensure representation at SJWS Balancing Meetings Invite ENTSOG to Gas WG Respond to ENTSOG balancing consultation Invite CEGH to WG Meeting

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Cross Border Pipeline Capacity

Storage

Fair and efficient access to short term capacity which is unsold or not being used Ability to assign capacity Virtual reverse flow Functioning secondary markets Available unsold capacity to be allocated on a bundled basis Capacity should not be hoarded Fair access to long/short term storage capacity for CCGT self-shippers Ensure storage flexibility can be fully exploited

Promote efficient capacity auction mechanism for short capacity in both directions Full transparency of capacity availability and nominations

Respond to ENTSOG CAM consultation Invite capacity platform provider (e.g. GATRAC, Trac-X) to Gas WG Briefing note on impact of CMP guidelines on CCGT operators

ENTSOG EU Comitology Committee

Highlight restrictions preventing CCGT self-shippers acquiring storage Promote storage auctions Encourage unbundled capacity to be made available in addition to bundled capacity

Respond to CEER review of GPSSO for CAM and CMP Invite CEER to Gas WG

CEER

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Interoperability

Harmonised gas day Accounting in energy units Standardised crossborder nomination times and renomination lead times OBAs and coordinated maintenance at all cross-border points TSO manages quality Differences Proper entry/exit systems in all Member States Virtual trading point

Highlight restrictions which require shippers to fill and empty storage within certain parameters and dates Highlight problems for CCGT operators resulting from inconsistent rules either side of cross-border interconnection points

Invite ACER to Gas WG Respond to ACER Interoperability consultation

ACER

Gas Market Design

Monitor compliance with 3rd Energy Package and highlight

Meet with Commission to express any concerns

Commission 2

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problems resulting from any lack of progress

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Strategic Objective

Work Area

Specific Requirements

Must Do

Specific Tasks

Key Responsible Party(s)

Commission

Priority in 2012 (1 to 3)

Supply Markets (Commodity) Ability to buy gas for CCGTs at a price reflective of the gas demand/supply fundamentals in the relevant market Cross Border Pipeline Capacity

Reliable and equitable supply relationships with suppliers Flexibility to reexport or re-sell gas to reflect price differentials

Promote relevant and hedgeable indexation in gas supply contracts

Develop a paper highlighting the current problems for CCGTs caused by indexation and resale restrictions Support gas target model development of hub-to-hub trading Develop a position paper on tariffs Respond to ACER/DG Energy tariff harmonisation paper

Equitable tariffs which minimise flow distortions and restrictions

Ensure tariffs minimise cross subsidy and are based on marginal costs.

Commission ACER 1

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LNG

Storage

Flexibility to redirect or re-load LNG cargoes to reflect price differentials Equitable tariffs and terminal arrangements which minimise flow distortions and restrictions Avoid strategic storage and non market based security of gas supply measures

Highlight any distortions relating to LNG cargo discharge Promote LNG capacity auctions

Feed into any ACER/CEER analysis of these issues

ACER CEER

Highlight any concerns arising from Member States Emergency and Preventative Action Plans under the SOS Regulation

Attend EU Gas Coordination Group Meetings

DG Energy

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