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WP EN2008-009

Analysis Of Balancing-System Design
And Contracting Behaviour In The Natural
Gas Markets
Nico Keyaerts, Leonardo Meeus, and William D'haeseleer

TME WORKING PAPER - Energy and Environment
Last update: October 08

An electronic version of the paper may be downloaded from the TME website:

http://www.mech.kuleuven.be/tme/research/
KULeuven Energy Institute
TME Branch

The results indicate that the current Dutch balancing-system design could incentivise shippers to engage in strategic overcontracting if they have no access to other flexibility instruments.kuleuven. it implies that they recognize that the current designs still have undesirable ∗ This paper has been written in the context of the project “Fundamental study of the macroscopic feed back loops and basic uncertainties in pipe and wired based unbundled energy markets with the aim of global. the optimal balancing-system design is far from established and in the framework of the European Regulators’ Group of Electricity and Gas different regional initiatives are developed. flexible optimisation from different viewpoints” funded by Fonds Wetenschappelijk Onderzoek Vlaanderen (FWO) Nico Keyaerts Please cite as TME-working paper 2008-009 available on http://www. balancing-system design has been receiving much attention from the different natural gas market stakeholders in an attempt to come up with some guidelines for a good balancing design. the optimal balancing-system design is far from established. Starting with some basic principles (CEER.be/energy 1 . † a University of Leuven (K. 2006). branch ESAT-ELECTA.Leuven) Energy Institute. Kasteelpark 10 P.O. we have arrived at some non-binding guidelines of good practice for gas balancing (ERGEG.Box 2421 B-3001 Heverlee b University of Leuven (K. Although this attempt resulted in the European Regulator’s Group for Electricity and Gas’ (ERGEG) “guidelines of good practice for gas balancing”.Keyaerts@mech. overcontracting 1 Introduction The optimal design of the balancing system is a major issue in the liberalised European natural gas market. In order to understand where the design needs to go to. fax: +32 16 32 29 85. William. 2008 Work in progress Analysis of balancing-system design and contracting behaviour in natural gas markets∗ Nico Keyaertsa .Revised October 31. If the market parties believe that the ideal balancing-system design is not yet established.kuleuven.O.kuleuven. strategic behaviour.Leuven) Energy Institute. Keywords: gas balancing. imbalance costs for different portfolios are calculated for a number of scenarios.Dhaeseleer@mech. branch Applied Mechanics & Energy Conversion. and William D’haeseleera. Based on the Dutch balancing system. Leonardo Meeusb .mech. this paper takes a look at the current designs to identify design flaws.U.U. Celestijnenlaan 300a P.be Abstract Recently. Nevertheless. 2003) in the early 2000’s.be Nico.Box 2445 B-3001 Heverlee † Corresponding author: Tel +32 16 32 25 10.

In the first order. 1. If too much gas is taken from the system.82 (2) p1 and p2 are the absolute entry and exit pressure [Pa]. defined as contracting less than the known total demand. defined as contracting more than the known total demand. cost optimality. and is mentioned here to illustrate the relationship between the volume gas flow rate and the pressure drop on a conceptual level. the authors look at the possible effects from the imbalance charging price structure on the contracting behaviour of the shipper. The line pack depends on the pressure levels and is not a static value: “line pack flexibility”is the appropriate term to refer to the property to store gas in the network by varying the pressure. Taking the pipeline dimensions as given.g. Entryt = Exitt + Systemt (1) The gas transportation system is driven by pressure differentials: gas flows from points with higher pressure to points with lower pressure. who is the balancing responsible party. gas powered compressors. The strategic behaviour could have implications for the network (technical problems) or. For strategic reasons.e. i. the constraint is relaxed by the dynamics of gas transport and the “line pack”. 2. 2 . The pressure in the system. is equal to the gas that enters the system (Entryt [W or GWh/h]). the pressure will drop. In this paper. a pipeline can only sustain a certain maximal pressure to operate safely. 1. respectively. L [m] and D [m]are the length and the internal diameter of the relevant pipe section. depends on the system balance. e. For instance. However. the upper and the lower pressure are usually constrained by technical and/or contractual requirements. Finally. overcontracting implies that at the end of the annual cycle too much gas will be entered in the system. Q˙st represents the volume gas flow rate [m3 /s] at standard conditions (pst = 1. the more gas can be transported. equation 1 should be met at any time (t). k is a constant depending on the other units chosen. and is 4810 for SI-units. the gas transportation system allows it to vary within certain limits: this network-based flexibility is called “line pack flexibility”2 . Tst = 288. Although the pressure is a critical factor for system integrity. Coelho & Pinho (2007) provide a thorough overview of this and other equations for steady state flow.side effects. the pressure will rise. more plausible. ρ is the relative density and is dimensionless. for the market (price volatility). So. or strategic undercontracting.15 K). Line pack is a term used to refer to the volume of gas that is present in the pipeline system. However. The gas transportation system is a dynamic system that is basically balanced if the sum of the gas that exits the system (Exitt [W or GWh/h]) and the gas that is consumed by the system (Systemt [W or GWh/h]). which is the inherent flexibility in the gas pipeline network. shippers can decide to engage in strategic overcontracting. The Renouard1 equation (Eq. p21 − p22 = kρQ˙ 1. whereas undercontracting leads to an end-of-year shortage of gas in the system. which is the responsibility of the transmission system operator. 2) illustrates the relation between the pressure drop and the gas flow.01325×105 Pa. The Renouard equation and the line pack flexibility are both illustrated in figure 1. If more gas enters the system than leaves the system. this paper looks at the balancing-system design. The Renouard equation is only one of many gas flow equations available. the larger the pressure differential.82 LD−4.1 Pipeline system integrity So.

which is the aggregate of the imbalances of all the individual shippers active in the system. All parties that have signed a transportation contract with the transmission system operator 3 . respectively.LINEPACK BUFFER CAPACITY 100 90 p p 1 emax 80 p pressure [bar] p 1’ 70 2 60 50 pdmin p2’ 40 30 20 PRESSURE DROP p emax 10 0 PRESSURE DROP p dmin 0 50 100 150 200 250 300 pipeline length [km] 350 400 450 500 Figure 1: Pressure drop required to transport 0. So.7 mcm through a 500 km pipeline. To achieve the desired volume flow rate. However. the entry pressure p1 technically can take any value between pemax and p1′ . The maximal line pack flexibility is represented by the area between the two extreme pressure drop lines. the TSOs use balancing systems that provide financial incentives to shippers. any p1 between pemax and p1′ is an acceptable entry pressure from a system integrity point of view. such as illustrated for the Dutch system in table 1. the transmission system operator (TSO) is responsible for ensuring the safe operation of the system. which is the inherent flexibility of the pipeline system. the parties deciding on the entries and exits in and from the network are the shippers4 . 1. which are the shippers. So. on the horizontal axis. and the individual shipper status on the vertical axis. respectively.2 Balancing-system design From the technical point of view. Firstly. As long as the pressure remains within the limits. the maximally allowable pressure at entry and the minimally required delivery pressure at exit3 are indicated by pemax and pdmin . the table has two dimensions: the status of the overall transportation system. In the figure. which is the entry pressure corresponding to pdmin . The table summarizes how shipper’s imbalances will be dealt with. The pressure drop required for transport corresponds to either [p2emax -p22 ] or [p21′ -p2dmin ]. The units are km for the pipe length and bar for the pressure. the current Dutch balancing3. 4. However. is an important instrument for the TSO to incentivise shippers to balance individually. Entry and exit in this sentence indicate the starting point and the ending point of the discussed pipeline section. the system integrity is ensured. Depending on the applicable quadrant for a given system and shipper status. The imbalance charge pricing structure. to shift the responsibility to the balancing responsible parties. the price charged for an imbalance could change. The area enclosed by pemax p2 pdmin p1′ represents the line pack flexibility. The pressures pemax and pdmin represent the maximal entry pressure and the minimum delivery pressure.

as illustrated in table 1 by the “In” prices. the Dutch system grants tolerances. e. The end-of-day cumulative imbalance is subject to the daily penalty. An individual shipper that knows how this system works will try to minimise his imbalance costs. Hourly penalties are due for imbalances registered during a single hour. whereas settlement is always carried out for the full imbalance.1. the Dutch balancing system requires the shippers to only pay the highest absolute amount of the cumulative and daily penalties in case on a day both the positive daily margin and the positive cumulative tolerance are exceeded. From this pricing structure all imbalance costs can be derived. Both studies look at a typical US balancing system. which is the follower. the shippers are subject to two types of imbalance costs. Thirdly. So. in order to minimise the former’s imbalance payments. 5. The same goes for negative daily and cumulative penalties. which is the aggregate of the hourly imbalances. and the pipeline operator. 4 .3 The imbalance cash-out problem From a pure optimisation modelling point of view.01% underestimate of imbalance costs) and was therefore not taken into account in the calculations. is the price at which the gas commodity is settled and can be a receivable for the shipper for a long position. however. Imbalances that are inside the tolerance levels of the shipper are charged with a zero penalty. Tolerances are only valid for penalties. The TSO’s interest. the question is whether the price structure provides the correct incentives to the shippers from the point of view of the TSO. 1. The penalties are due for both the highest positive and lowest negative peaks over the course of a day of the cumulative imbalance.g. to the shippers. Secondly. Kalashnikov & R´ıos-Mercado (2006) and Dempe & al. or a payable to the TSO in case of a short shipper. Penalties are surcharges for imbalances and are always due by the shipper to the TSO. Secondly. The Dutch tolerance space becomes temperature dependent for gas days that have the average daily temperature below 0◦ C. So. The effect of this temperature dependency for a typical Dutch weather profile is negligibly small (error < 0. this paper looks at European gas markets. Cumulative hourly penalties are charges based on the cumulative imbalance. taking the Dutch balancing system as an example. Settlement. the focus of this paper is on the behavioural effect of the current balancing-system design on a rationally behaving shipper that has to contract gas upstream to deal with its downstream contractual liabilities.2. lies in minimising the system imbalances and thus in having the shippers minimise their individual imbalance.system design does not explicitly differentiate prices according to the transportation system status. tolerances represent flexibility that is available for the shipper in the system. The Dutch balancing system charges penalties on three levels. line pack flexibility. which are explained in more detail in section 2. which is the leader. On the contrary. (2005) have already studied these kind of natural gas cash-out problems. They used mixed integer bi-level programming to model the strategic game between the shipper. on the other hand. These tolerances are a function5 of the transport capacity booked at entry and exit points. To alleviate the burden for the shipper. This paper is different from the two above mentioned studies in that this paper does not explicitly aim to optimise the imbalance cost for the shipper.

short system + short shipper. So. II. long system + short shipper.Cumulative In Out 0 -100% APX TTF 0 -100% APX TTF Daily In Out 0 -100% APX TTF 0 -100% APX TTF Settlement In Out -100% APX TTF -100% APX TTF -100% APX TTF -100% APX TTF Hourly In Out 0 -10% APX TTF 0 -10% APX TTF Cumulative In Out 0 -100% APX TTF 0 -100% APX TTF Daily In Out 0 -100% APX TTF 0 -100% APX TTF In Out +100% APX TTF +100% APX TTF +100% APX TTF +100% APX TTF Penalties In Out Penalties Short Long Shipper imbalance Hourly System imbalance Short Long 0 0 -15% APX TTF -15% APX TTF Settlement Table 1: Overview applicable imbalance prices relative to the system imbalance status on the horizontal axis and the shipper imbalance status on the vertical axis. whereas the positive sign indicates a receivable for the shipper. four quadrants are defined: I. long system + long shipper. which is the APX TTF [A C/MWh] for the Dutch balancing system. and IV. The negative sign indicates a cost for the shipper. short system + long shipper. All prices are expressed as percentages of the reference price. 5 . III.

but by the resulting imbalance costs. For the calculation of the tolerances. given that many flexibility instruments are not readily6 available to new entrants or small shippers. the assumption is not completely unrealistic. Therefore. As far as transport capacity bookings are concerned. 6 . 2. Otherwise the shipper will face imbalance charges. Finally section 4 summarises the main conclusions of this research. the single shipper is assumed to have no flexibility instruments available. The demand portfolio is uncertain and variable. whereas in section 3.4.1 Balancing rules All calculations follow the rules of the Dutch balancing system that were in operation in July 2008 (Energiekamer. the shipper is assumed to know the total annual demand and to contract a multiple (ranging from 0. This shipper needs to manage its supply and demand portfolio in order to minimise imbalances between entries and exits. and thus to anticipate on it. the shipper is active in the competitive parts of the liberalised European gas markets and its behaviour is not driven by physical imbalances. However. Thirdly. would be profitable in a natural gas market without flexibility.1 to 2.2. The assumption is also consistent with the previous assumption of no flexibility to modulate supply. This assumption leads to an extreme situation in which the exposure to imbalance costs is overestimated. Section 3. Storage capacity that is sold under long term contracts. 2 Methodology for calculating imbalance costs The point of view taken by the authors is that of the individual shipper. the methodology will be explained. the shipper’s supply contract is assumed to be constant throughout the year.3 the price structure is made dependent on the system imbalance. To establish whether strategic contracting behaviour. an amount of capacity equal to the constant hourly contracted supply is assumed to be booked at both entry and exit. In section 3. Finally.5) of this amount at the supply side. Secondly. the shipper cannot modulate his supply contracts to his demand contracts. which are granted piecewise linearly based on the booked entry and exit capacity [m3 /h]. 2.1 Assumptions The calculations are carried out taking a number of assumptions into account.2 the effect of the penalty level in the price structure is looked at. 2008). Section 3 reports and explains the results of the calculations. the imbalance costs for different supply contracts are calculated. Firstly. contractual production flexibility that is lower for second-tier or third-tier gas wells etc.1 looks at the current Dutch balancing-system design and acts as the reference case for the other results. defined as either overcontracting or undercontracting. the shipper is assumed to understand the dynamics of the price structure of table 1.In the next section. However. 6. A last scenario that does include flexibility is dealt with in section 3. This assumption is consistent with the rigidities in upstream gas markets where capital intensive infrastructure prefers high stable load factors.2 Data 2. Four scenarios are investigated.

which correspond to hourly imbalances. However. 7 .000 m3 /h ≤ 250. b: the actual daily tolerance is equal to min{daily margin. Therefore. the imbalance cost calculations require an appropriate imbalance profile as well.969 GWh. This time shift entails that exit-gas at time t is balanced with entry-gas at time t + 2. There are three brackets with decreasing tolerances for increasing capacity portfolios. The daily tolerance. correlates with the end-of-day daily imbalance and is granted linearly. In line with the assumptions laid out in section 2. Hourly and cumulative hourly tolerances are granted according to different capacity brackets. Table 2: Tolerance parameters. exit & imbalance profiles Besides a set of balancing rules.000 m3 /h and > 1.5% 92. on a better informed basis.000 m /h 22. the applicable data.)/2a > 250. The cumulative tolerances for cumulative imbalances are equal to four time the hourly tolerances. whereas the daily tolerance is a fix percentage for the whole booked capacity. The demand9 7.2. called “daily margin” in the Dutch system.2 Entry. http://www. the tolerance levels remain constant throughout the year. Although this analysis is based on the Dutch system with data related to its balancing design. Therefore. a typical residential gas demand profile originally from Belgium was chosen. The origin of this demand profile – which is basically genuine – is actually not fundamental. Gas Transport Services7 . which corresponds with an indicative commodity value of approximately8 200 million Euro. which represents the demand side. in this paper the imbalance calculations are independent of the time shift. which represents the supply side. Tolerances granted are expressed as m3 /h. This shift is motivated by the Dutch TSO because the inherent flexibility in the system allows it and because the shippers can manage their imbalances. the daily tolerance cannot exceed the cumulative tolerance applicable for that day. The portfolio totals an energy demand of 11. were extracted from the website of the Dutch TSO.Hourly Cumulative hourly Daily marginb Dutch tolerances tolerances % of (entry cap. Another rule of the Dutch balancing system introduces a standard time shift. cumulative hourly tolerance}.000.gastransportservices. As mentioned above. the tolerance space of the shipper was determined from its fixed supply contract.8% 53. the temperature dependency of the granted tolerances was neglected.5% 13% 7.000.000 m3 /h 3 ≤ 1. by adapting their entries.1. As will be explained below in more detail. For an average natural gas price of 17 A C/MWh 9. An imbalance profile is the result of the difference between an entry profile. and an exit profile. The exit profile is a typical residential demand contract portfolio for one calendar year. illustrated in table 2. + exit cap. the entry profile is flat throughout the year.8% 36% 36% 36% a: below 0◦ C tolerances decrease linearly to 2% (hourly) and 4% (cumulatively) at -17◦ C.6% 22. 2.nl [Accessed 29 September 2008] 8. Tolerances are expressed in m3 /h and are calculated as a percentage of booked capacity.

5 0 1000 Figure 2: 2000 3000 4000 5000 time [h] 6000 7000 8000 The hourly entry and exit profiles for a typical calendar year (200x). the entry profile is a flat profile.5 2 1.be [Accessed 12 March 2007] 11. The horizontal lines represents a constant supply at the entry. all expressed in power flux [GWh/h] on the vertical axis and time [h] on the horizontal axis. expressed in GWh/h for the 100% demand covering supply contract for a typical year and a zoom in on this profile. P8760 demandh supplyh = 1 (3) 8760 So. Eq. respectively. Figure 3 provides a zoom in on the profiles for a 7-day period.Entry & Exit profiles Entry & Exit profiles 4. To simulate undercontracted and overcontracted supply portfolios the baseline contract (Eq.be [Accessed 17 October 2006] 12. and it represents simulated 2006 hourly gas deliveries from a certain distribution system operator (IGAO) for a specific area (Antwerp). the red line and the cyan line representing total contracted amounts of gas equal to 50%. the red line and the cyan line representing total contracted amounts of gas equal to 50%. with the green line. The units are basically GWh/h . the blue fluctuations reflect the varying demand.vreg.5 EXIT ENTRY 50 % ENTRY 100 % ENTRY 150 % 2. As mentioned above. 100% and 150% of the total annual gas demand.5 3 EXIT ENTRY 50 % ENTRY 100 % ENTRY 150 % 4 3 power flux [GWh/h] power flux [GWh/h] 3.indexis.5 0. http://www. 3 explains how the supply profile was constructed.fluxys. 100% and 150% of the total annual gas demand. It illustrates well the typical daily cycle of a residential gas demand Imbalance profiles result from subtracting the exit profile from an entry profile (Eq. the baseline supply contract covers 100% of the total annual demand. which is the Belgian metering company. http://www. Figures 4 and 5 illustrate the annual imbalance profile. with the green line. respectively.5 2 1. the blue fluctuations reflect the varying demand. The hourly gas injections (supplyh [GWh/h]) are P8760 equal to the hourly average of the total yearly demand ( 1 demandh [GWh/h]). for a 7-day period in a typical calendar year (200x). hourly supplies are constant over the whole year. imbalanceh = entryh+2 − exith (4) 10. http://www. 3) is multiplied with a factor ranging from 10% to 250%. respectively. The annual demand profile and a sample of supply profiles are plotted in figure 2.5 1 1 0. 0 7220 7240 7260 7280 7300 time [h] 7320 7340 7360 Figure 3: Zoom in on the hourly entry and exit profiles [GWh/h]. data from the Belgian transmission system operator Fluxys11 and data from Indexis12 . a time shift of two hours has to be taken into account. In line with the assumptions explained above.5 2. 4). profile was created based on historic distribution data retrieved from the Flemish energy regulator. The horizontal lines represents a constant supply at the entry.be [Accessed 15 March 2007] 8 . Consequently. VREG10 .

5 −1 −1.3 Imbalance cost calculation: example In this section. exit exceeds entry. i. i. The Dutch balancing rules appoint the APX TTF-Hi Day Ahead All day Index [A C/MWh].2.3 Reference price A last piece of input required for the calculations is the applicable reference price. or the other way around.e. and negative values to short imbalances. For the 50% annual demand covering contract the profile shifts down (predominantly short imbalances). which is publicly available on the APX website14 .e.5 power flux [GWh/h] 0 GWh −0.5 0. 10.5 7220 h Figure 4: Hourly imbalance profile [GWh/h] resulting from the difference between the entry profile for the 100% annual demand covering contract and the exit profile for a typical calendar year (200x). the applicable “gross calorific value” (GCV. Positive values correspond to long imbalances. The latter can 13. Total costs are thus the sum of the penalty costs and the settlement value. 7240 7260 7280 7300 time [h] 7320 7340 7360 Figure 5: Zoom in on the hourly imbalance profile [GWh/h] for the 100% annual demand covering contract and the exit profile for a 7day period in a typical calendar year (200x). entry exceeds exit.com [Accessed 22 August 2008] 9 . the imbalances become predominantly short (profile shifts down) and long (profile shifts up). The calculations in this paper use the real APX TTF of 2007. hereafter APX TTF. For the 50% and the 150% annual demand covering contracts.5 1 0. http://www. Figure 6 plots the 2007 index: the units are time [days] on the horizontal axis and price [A C/MWh] on the vertical axis. the imbalance cost for one day will be calculated in detail for illustrative purposes.apxgroup. 2. which is the reference price for both penalty charges and settlement.291 kWh/m3 ) for the gas was retrieved from Indexis’ data.Imbalance 100 % Imbalance 100 % 1 1. To convert the imbalances from volumes [m3 ] to energy [Wh or kWh]. 2.5 −3 −3. This APX TTF daily index is a volume weighted average price of all day-ahead transactions on a specific day. Table 3 provides the detailed imbalance cost calculations for a single day. Figure 7 plots the hourly [m3 /h] and cumulative hourly [m3 /h] imbalances and the different tolerance levels [m3 /h] for 24 hours of a typical day. and for the 150% demand covering contract the profile shifts up (predominantly long imbalances). This conversion is required because tolerances are expressed in gas flow rate [m3 /h] and the APX TTF prices are expressed in energy units [MWh]. Neutral gas price 14. as the “neutrale gasprijs”13 . respectively.5 −2 −1 −2.5 1000 2000 3000 4000 5000 6000 7000 8000 −1.5 0 −0.

A positive sign would indicate a receivable amount and would occur when the daily imbalance to settle is long. The negative sign in the cost-column indicates a cost born by the shipper. only 10% of the total annual demand.4) the “no flexibility”-assumption is relaxed. up to 250% of the total annual demand. In section 3. In a final scenario (section 3. Costs are always calculated on the absolute value of the imbalances. 3. Figure 8 summarises the annual imbalance costs for shipper contracting behaviour ranging from substantial undercontracting. to massive overcontracting. The first scenario (section 3. is modelled. if the end-of-day imbalance is long. each representing a specific scenario. 3 Results This section reports the results of the calculations carried out.1 Scenario 1: benchmark In this benchmark scenario the actual Dutch system. From figure 8 it becomes clear that if a shipper has no flexibility to modulate his supply to an uncertain demand. as explained above.APX TTF 2007 30 price [EUR/MWh] 25 20 15 10 APX TTF−Hi DA All−day index 5 50 100 150 200 time [d] 250 300 350 Figure 6: APX TTF-Hi Day ahead All day Index [A C/MWh] for Jan 1 – Dec 31 2007. There are four subsections. a “revenue”.3) takes a look at the effects of a shipper-system correlation. Table 3 illustrates well which optimality-criterion for the shipper portfolios is used in the next sections of this paper: the shipper minimises penalty costs and settlement value. be a positive value. whereas contracting 10 .e.2 the effects of asymmetrical penalties are investigated.1) takes the current Dutch balancing-system design as its starting point. Contracting exactly (100%) the total annual demand results in imbalance charges amounting to approximately 180 million Euro. The index is a volume weighted average price of all single-day transactions. Scenario 3 (section 3. the shipper has an incentive to engage in strategic overcontracting. i.

30 29872.imbalance hourly tolerance [m3 /h] chargeable imbalance [m3 /h] penalty [m /h] cumulative imbalance [m3 /h] [%] [A C/m ] [A C] 75638.63 47567.30 -29872.30 -29872.1744 0.1744 0.44 44075.32 -1217.30 29872.54 -921.95 -79238.51 -9176.98 -9.30 -29872.25 0 16724.1744 0.30 29872.22 -119489.60 Settlement -77518.80} is part of the total cost.90 53490.31 -792.1744 0.30 71277.1744 0.1744 0. 13821.55 11111. only max{5184.13 -65083.87 -141019. 11 .30 29872.53 39807.22 daily tolerance [m3 /h] 210134.97 -18320.11 38390.21 0 0 0 0 0 0 0 -17430. whereas in the last part of the table the settlement value is calculated.30 -29872.23 45407.15 -70603.95 10277.78 36352.47 6479.1744 0.67 -356.30 -29872.55 63500.1744 0.1744 0.54 75279.15 -113.03 15932.16 41427.30 -131.16 -20484.1744 -798.06 -1023. The first part of the table lists the calculations of the hourly imbalance costs.1744 0.1744 0.28 224866.86 46596.30 29872.30 29872. Table 3: Imbalance calculation for one day.40 17786.69 -29722.28 -46524.1744 0.63 10 10 10 10 10 15 15 15 15 15 10 10 10 10 10 15 15 15 15 15 15 10 10 10 0.30 29872.1744 0.84 68405.29 a The Dutch balancing rules specify that only the higher absolute value of the daily penalty and the cumulative peak penalty with the same sign is due by the shipper.29 -535.17 -198727.72 -586. In the second part the cumulative and daily penalty costs are calculated.93 0 0 0 0 0 0 0 -456.52 100 100 0.91 329624.30 -29872.30 29872.1744 0.36 100 0.30 -29872.32 -39118.82 -35211.36 29872.72 -118142.46 -100475.58 1416.25 33628.30 -29872.1744 -5184.74 73947.73 -187615.82 -672. Positive values indicate long positions (m3 /h-values) or shipper revenues (A C-values).23 63235.59 3 h1 h2 h3 h4 h5 h6 h7 h8 h9 h10 h11 h12 h13 h14 h15 h16 h17 h18 h19 h20 h21 h22 h23 h24 price 3 cost cumulative tolerance [m3 /h] Long peak Short peak 329624.68 100 0.1744 0.1744 0. So.1744 0.30 29872.47 -50356.54 38533.40 -53058.30 29872.1744 -13521.1744 -36654.1744 0.30 -29872. Negative values indicate short positions (m3 /h-values) or shipper costs for A C-values.1744 0.97 -30228.30 -29872.1744 0.48 -34914.94 75638.1744 0.73 119489.30 29872.25 -70270.05 -768.36 daily imbalance [m3 ] -47795.19 -47302.30 29872.95 -40398.01 -1847.11 82481.31 -77518.63 -68991.03 -1057.70 158878.35 -13821.17 -198727.32 0 -291.73 12062.80 Dailya -77518.17 -5042.17 259353.59 -76396.1744 0.19 -168499.30 -29872.1744 0.1744 0.70 Total -75220.62 1620.60.36 / -77518.13 293271.25 81555.30 45766.54 150918.

hourly tol. at least to a certain extent depending on the applicable prices. The red line represents the cumulative hourly imbalance and is thus the aggregated sum of the hourly imbalances. green and cyan dashed lines represent the hourly. expressed in m3 /h. This analysis revealed that for the Dutch balancing system and for the used entry and exit profiles a trade-off is taking place between the increasing costs of the combined daily and cumulative penalties and the increasing settlement “revenue” for long imbalances. Firstly. in a properly designed balancing system. i. Given the assumption of no flexibility. To identify the deeper causes of these results. The magenta. cum. imbalance daily tol. the reference price should reflect the costs incurred by the TSO in balancing the overall system and the price should be a “default price”. the payment for the excess gas would cancel out with the settlement revenue. The optimum is reached at the 150% contract. 150% of the total annual demand results in imbalance charges totalling 150 million Euro. The blue bars represent the hourly imbalance. the penalty and settlement costs were given a closer look. So. Secondly. This results in relatively large cumulative imbalances. the excess gas that results from overcontracting has to be paid as well. and thus the price should be worse than the regular wholesale trade price. 12 . The hourly penalty costs are a factor 10 smaller and are not decisive for the optimum due to the properties of the imbalance profile15 . as can be seen in figure 9. the settlement switches from a cost for undercontracting to a revenue for overcontracting.5 4 imbalance on day 289 x 10 hourly imbalance cumul. The combined cumulative and daily penalty costs increase rapidly with increasing overcontracting. tol. whereas the dotted black lines mark the maximal and minimal cumulative imbalances for the day. 3 3 imbalance [m /h] 2 1 0 −1 −2 2 4 6 8 10 12 14 time [h] 16 18 20 22 24 Figure 7: The imbalance profile for a typical day for the 100% annual demand covering contract. However.e. As a consequence. daily and cumulative hourly tolerance limits. without those imbalances cancelling out. many days with persistenly long or short hourly imbalances occur. the rising penalty costs are initially offset by the settlement revenue. The units of the cumulative imbalance are basically also m3 /h. as illustrated in figure 10. It can be argued that the settlement revenue is not a real revenue. 15. from where on the costs rise more steeply than the revenues. the price of last resort.

5 0. The contracted supply portfolios on the horizontal axis are expressed as percentage of the total annual demand.5 3 cost [EUR] 2. 8 5 x 10 Combined daily and cumulative penalties per contracted supply portfolio 8 2 4 1 3. For contracts up to 100%. i. whereas the contracts on the horizontal axis are expressed as percentages of total annual demand.5 0 −0. settlement becomes a revenue. 13 .5 1 0. 200% means that the shipper has contracted 200% of the total annual demand at the supply side.5 0 Figure 9: Commodity settlement per contracted supply portfolio 1. Costs have 100 million Euro as units. The units are 100 million Euro on the vertical axis.5 1 −2 0.5 2 1. Penalty costs rise increasingly steeper with larger overcontracting.5 −1 −1. settlement is a cost for the shipper. −3 50 100 150 contract size [% total annual demand] 200 250 Figure 10: The settlement value per contracted supply portfolio.5 2 1. Imbalance costs on the vertical axis have 100 million Euro as units.5 3 2.5 cost [EUR] cost [EUR] 4. The contracts are expressed as percentages of total annual demand.5 −2.e.8 4 Imbalance cost per contracted supply portfolio x 10 3.5 0 50 100 150 contract size [% total annual demand] 200 250 Figure 8: Total annual imbalance costs per contracted supply portfolio. In case of undercontracting the costs do not vary substantially (on the used scale).5 x 10 50 100 150 contract size [% total annual demand] 200 250 The combined cumulative hourly and daily penalty costs per contracted supply portfolio. For larger contracts. overcontracting. So.

the asymmetry is increased. i. the optimum started shifting towards less overcontracting. asymmetrical penalties for short and long cumulative and daily positions were introduced into the model.e. then the settlement revenue becomes the dominant factor. i. the lower the penalty. the 190% contract. becomes optimal.e.2 -70% APX TTF -70% APX TTF -100% APX TTF -100% APX TTF Favourable treatment penalties for long positions Scenario 2: asymmetrical penalties In this second scenario the effect of the penalty levels is looked at. a short shipper pays a 70% penalty and a long shipper a 100% penalty. even larger overcontracting. As can be seen in figure 12 the 150% remains optimal. the optimum shifted further to the right. This case is illustrated in figure 11 When the penalty was increased further. i. In that case. e. The reason for this slow shift is the dominance of the unchanged settlement revenue for overcontracted portfolios. for which the cash-out comes down to figure 10. The benchmark scenario makes clear that the combined daily and cumulative penalty cost is the most relevant penalty cost in these specific calculations. the more overcontracting becomes beneficial. Such a relation will be looked at in a third scenario.Short Cumulative Daily System imbalance Short Long -100% APX TTF -100% APX TTF -100% APX TTF -100% APX TTF Long Cumulative Daily -70% APX TTF -70% APX TTF Shipper imbalance Table 4: Favourable treatment penalties for long positions Short Cumulative Daily System imbalance Short Long -70% APX TTF -70% APX TTF -70% APX TTF -70% APX TTF Long Cumulative Daily -100% APX TTF -100% APX TTF Shipper imbalance Table 5: 3. When both short and long imbalances were granted the same less restrictive treatment. only a 70% surcharge for daily and cumulative hourly imbalances (table 4). Tables 4 and 5 present the changed penalties compared to the benchmark price structure from table 1. 14 . Conversely.g. seems to stimulate shippers to overcontract without limits in order to cash the settlement revenue for long positions. Therefore. If all penalties would become 0. no substantial difference was established compared to the benchmark. both sides penalised at 60%.e. a pure settlement based balancingsystem design is obtained. when the favourable treatment was granted to short imbalances (table 5). Only when the short penalty is reduced even more. When long positions received a more favourable treatment. This statement does not take into account the possible correlation between the shipper imbalance and the system imbalance. Such a system.

e. the reference price will rise.X Long reference price + X reference price . four quadrants are defined: I.5 cost [EUR] cost [EUR] 2. 15 . For a negatively correlated shipper. The proposed new price structure is summarised in table 6.5 2 2 1. whereas quadrants II and IV have a mark-down because of excessive supply of gas.5 0 50 100 150 contract size [% total annual demand] 200 Figure 11: 250 The imbalance cost per contract portfolio with a favourable long penalty of 70%. whereas contracts are expressed as percentages of total annual demand on the horizontal axis.X Table 6: Overview price structure with applicable reference price depending on the system imbalance. though they were taken into account in the calculations for this scenario. The optimum shifts to the right as the treatment of long imbalances becomes increasingly favourable. II. Short System imbalance Short Long reference price + X reference price . whereas X represents an unknown value depending on the size and the sign of the actual system imbalance. the reference price is assumed to be perfectly positively correlated with the system status. counter-system imbalances are “rewarded” with lower penalties for short positions and higher settlement revenues for long positions. The optimum shifts slowly to the left as short imbalances are treated increasingly favourable. and thus.5 0. This means that when the system is short and demand for gas to balance is high.5 1. the reference price will drop. The price structure in the table is simplified: tolerances were not inserted for reasons of clarity. Shipper imbalance 0 50 100 150 contract size [% total annual demand] 200 250 Figure 12: The imbalance cost per contract portfolio with a favourable short penalty of 70%. Therefore. In the table “reference price” should be interpreted as an average price for gas depending on exogenous factors. short system + long shipper.3 Scenario 3: shipper’s effect on system imbalance In this scenario. If the shipper imbalance is positively correlated with the system imbalance. Oppositely. and IV. i. short system + short shipper. long system + long shipper. 3. when there is too much gas in the system. III. whereas contracts are expressed as percentages of total annual demand on the horizontal axis. Costs are expressed in 100 million Euro on the vertical axis.8 4 8 Imbalance cost per contracted supply portfolio x 10 3. The units of the prices are A C/MWh. a perfectly operating balancing market. the effect of a positive or a negative correlation between the shipper’s status and the system’s status will be investigated. long system + short shipper. Costs are expressed in 100 million Euro on the vertical axis.5 Imbalance cost per contracted supply portfolio x 10 3 3 2. supply surpasses demand. Quadrants I and III have a mark-up X because of high demand for gas.5 1 1 0.5 3. So. the shipper will pay high penalties for short positions and receive less settlement value for long positions.

Although the negative correlation implies that a shipper with a long position receives the markup that is induced by the shortness of the system. Although the settlement revenue for overcontracting decreases due to the mark-down. the mark-up was added when the shipper was long and the mark-down when the shipper was short. To model the (perfectly) negative correlation. resulting in an decreasing portfolio compared to the reference scenario.5 2 1. illustrated in figure 13. For the perfectly negatively correlated shipper and system the optimal overcontracting decreases to the 130% contract. The optimum continues to shift to the right when the mark-up and mark-down are further increased from their initial value of 10%. The mark-up and mark-down were calibrated with a factor16 to take the size of the imbalance into account. For the perfectly positively correlated shipper and system.8 4.5 1 1 0. the mark-up significantly increases the penalty costs for intolerated imbalances as well. However. the resulting drop is offset by the decreased penalty costs resulting in an optimal portfolio to the right of the reference case.5 0 50 Figure 13: 100 150 contract size [% total annual demand] 200 250 The imbalance cost per contract portfolio for a perfectly positively correlated shipper and system imbalance. the penalty costs increase as well. This is a slight increase compared to the reference case. this drop is offset by the lowering of the penalty costs resulting in an overcontracting optimum to the right of the benchmark case. Although overcontracted portfolios suffer from lower settlement revenue. whereas contracts are expressed as percentages of total annual demand on the horizontal axis.5 0. This implies that perfect correlation was assumed. 0 50 100 150 contract size [% total annual demand] 200 250 Figure 14: The imbalance cost per contract portfolio for a negatively correlated shipper and system imbalance. A positive correlation between the shipper and the system was modelled by having a mark-down when the shipper was long. because the penalty costs for a short shipper position lower significantly due to the mark-down caused by the long status of the system. Costs are expressed in 100 million Euro on the vertical axis. For even higher mark-ups and mark-downs undercontracting becomes optimal. respectively. the 160% overcontracting portfolio becomes optimal. the absolute value of the daily imbalance divided by the mean value of the absolute daily imbalances 16 .5 2 cost [EUR] cost [EUR] 3 2.5 3. When the mark-up and mark-down were raised to 15% the optimal contract approached the neutral 100% contract. as can be seen in figure 14. The correlation scenario was modelled using a fixed average gas price of 15 Euro increased with a mark-up or mark-down for a system that is short or long. 16.5 1. a value that was chosen arbitrarily by the authors. Costs are expressed in 100 million Euro on the vertical axis.5 8 Imbalance cost per contracted supply portfolio x 10 3 Imbalance cost per contracted supply portfolio x 10 4 2. Overcontracting raises the settlement revenue because of the short system mark-up. whereas contracts are expressed as percentages of total annual demand on the horizontal axis. and a mark-up when the shipper was short.

4 Scenario 4: introducing flexibility The fourth scenario looks again at the benchmark Dutch balancing system price structure (table 1).5 1 0. the asymmetry between short and long hourly penalties implies that small overcontracting can still be favourable. The optimal supply portfolio for a shipper without any other flexibility amounts to contracting 150% 17 . it does pay for the shipper to engage into strategic overcontracting if the shipper has no access to other flexibility.5 2 1. P h=24 h=1 demanddh (5) supplydh = 24 Figure 15 summarises the results of this calculation. Thereto. 3. 4 Conclusions The main conclusion of this research is that for a balancing-system design based on the current Dutch design. The contracted supply portfolios on the horizontal axis are expressed as percentage of the total annual demand.5 0 50 100 150 contract size [% total annual demand] 200 250 Figure 15: Total annual imbalance costs per contracted supply portfolio with access to flexibility. However. The flexibility available to the shipper allows reducing imbalances. the shipper can adapt its supply on a daily basis (Eq. in this more realistic scenario. Imbalance costs on the vertical axis have 100 million Euro as units. Nevertheless.5 3 cost [EUR] 2. With access to flexibility the shipper has no longer an incentive to engage in substantial overcontracting. the model had to be modified: now. whereas overcontracting or undercontracting would result in introducing new imbalances and thus penalty costs. the shipper is assumed to have access to some flexibility to modulate his supply to the uncertain demand. 5).8 4 Imbalance cost per contracted supply portfolio x 10 3. So. This is clearly illustrated by figure 15: there is little difference in the range from 100% to 120%. This result is caused by the substantial decrease of the penalty costs for the neutral 100% contract. for every day (d) his hourly P entry (supplyd h [GWh/h])was modelled as 1/24th of the total daily demand ( h=24 h=1 demanddh ). A shipper who has access to flexibility no longer has an incentive to engage into substantial overcontracting as the 100%-110% contracts seem optimal.

Z. & Pinho. XXIX. decreasing the overcontracting becomes optimal. R. On the contrary. when the short side receives favourable treatment. C. p. if all shippers would overcontract. No. giving wrong signals to the transmission system operator.. the optimum shifts to the right. some small overcontracting might still be induced by the asymmetry between short and long hourly penalties. Kalashnikov. the upstream (acquiring the supply) and downstream (selling the gas) cash flows involved in the shipper business could be taken into account to correct for the settlement “revenue” of overcontracting. When the shipper and the system are positively correlated. When the penalty for long imbalances is lower. Vol. (2005) Discrete bilevel programming: Application to a natural gas cash-out problem. V. Indeed. References Council European Energy Regulators (2003) Principles for Balancing Rules – September 2003 Coelho. Introducing asymmetrical penalties shifts the optimal portfolio in the direction of the imbalance treated more favourably.Z. 166. Journal of the Brazilian Society of Mechanical Science & Engineering.. No. Version 1 July 2008.nl ERGEG (2006) Guidelines of Good Practice for Gas Balancing – 6 December 2006.469488 Energiekamer (2008) Transportvoorwaarden Gas – LNB. then this behaviour would result in a system that is persistently long. to other shippers and potentially to the market. Vol. & R´ıos-Mercado. (2007) Considerations About Equations for Steady State Flow in Natural Gas Pipelines. More detailed research on the effects of the balancing-system design on contracting behaviour of a shipper that has flexibility is required. S. 3. Available at http://www. the results reported in section 3 show that the balancing-system design potentially has undesirable effects. Nevertheless. No.of the known total annual demand. Optimization & Engineering. 4. 4. In summary. (2006) A natural gas cash-out problem: A bilevel programming framework and a penalty function method. V. the need for overcontracting is reduced and the optimal portfolio shifts slowly towards the neutral 100% portfolio for increasing mark-up and mark-down. R. Furthermore. Brussels Kalashnikov. R´ıos-Mercado. 2.energiekamer. in case the shipper and the system are negatively correlated. Vol. p. which means even more overcontracted portfolios than the reference case portfolio become optimal. 262-273 Dempe. overcontracting is stimulated even more.403-420 18 . P. European Journal of Operational Research. Similarly. p. A shipper that has access to flexibility has no longer an incentive to engage in massive strategic overcontracting.