In the “Bridge to 2025”, regulators
set out their thinking on the key challenges and the possible responses to
secure the appropriate regulatory framework for the coming decade. The present
document renews and updates the Gas Target Model (GTM) developed in 2011. The
core principles that underpin our vision for European gas markets will remain
the same today as when the GTM was first published. This vision is of a
competitive European gas market, comprising entry-exit zones with liquid
virtual trading points, where market integration is served by appropriate
levels of infrastructure, which is utilised efficiently and enables gas to move
freely between market areas to the locations where it is most highly valued by
gas market participants. However, the European gas market and the uncertainties
and challenges it faces have changed fundamentally, and this requires a new
mind set in order to adopt the correct regulatory approach when looking forward
to the next decade. You can have a look at the latest GTM here.
The Network Codes will bring Europe
closer to this vision. Implementing them in full and on schedule is the right
priority and the focus for regulators and other stakeholders today. However,
the Network Codes alone are unlikely to deliver a “well-functioning transparent
gas wholesale … market” that benefits consumers across Europe, as required by
Regulation (EC) No 715/2009. Consequently, this revised GTM not only guides the
coherent development and implementation of the Network Codes, but also
specifies the steps required to realise liquid and dynamic gas markets thereby
enabling all European consumers to benefit from secure gas supplies and
effective retail competition.
Increasing uncertainty in supply and
demand
An important factor in revising the
GTM has been changing gas market dynamics. The supply and demand picture has become
increasingly uncertain in recent years. For a long period, gas demand had been
rising relentlessly. A combination of factors has changed that. In particular,
the shale gas revolution in America has put gas-intensive European industrial
enterprises at a competitive disadvantage. At the same time, the coal displaced
from the American generation mix has lowered coal prices in Europe such that
coal-fired generation is now far more profitable than running gas-fired power
stations. The low emission allowance price has also exacerbated this
phenomenon. On the supply side, European Union (EU) production, which is
located largely in the UK and the Netherlands, is declining. Whilst
unconventional gas production will be a positive development as far as domestic
output is concerned, it is unlikely to have a significant impact on gas
supplies, even in the most optimistic scenarios, until well into the
2020s.
Competitive markets ensure Security
of Supply
Security of Supply and competition
work in concert; the more pluralistic upstream supply is in Europe, the less we
will depend on any one source of supply that may be subject to either physical
restrictions or political interference. Our research shows that thirteen Member
States do not meet the original GTM target of a Residual Supply Index (RSI) of
over 110% of demand, whilst most Eastern European countries cannot currently
hit this target.
The GTM strongly affirms that
well-functioning gas markets remain essential providers of supply security.
Building on the original GTM, we recommend further enhancements to market-based
measures, such as ensuring that imbalance prices remain dynamic throughout an
emergency, with no cap on prices (up to the value of lost load, or VoLL), in
order to strengthen incentives for market participants (including storage
users) to deliver supply security. In addition, we propose full unbundling of
storage products and setting appropriate network tariffs for storage users. We
note that it can be difficult to give Transmission System Operators (TSOs)
incentives to work together to build large, complex projects from relatively
distant regions (and such projects are often unable to access capital markets).
Relevant public bodies should give priority status to such infrastructure
investments and be able to promote them as projects of common interest
(PCIs).
Wholesale market functioning
The GTM interprets the Gas Regulation
requirement of “facilitating the emergence of a well-functioning and transparent
wholesale market” as implying a liquid spot market and, crucially, a liquid
wholesale forward and/or futures market, so that cost-effective wholesale
market risk management is possible. For example, this means that a new entrant
can sell a fixed-price contract to a consumer for delivery of gas in a year’s
time, and in turn purchase the required gas at a fixed price in the wholesale
gas market. Research we have undertaken shows that forward trading is highly
limited across the EU. This point is of critical
importance.
Interconnections have a key role to
play in achieving a functioning EU market. The Capacity Allocation (CAM)
Network Code and the Congestion Management Procedures (CMP) Guidelines
represent a fundamental step forward, but are not sufficient in many cases. The
updated GTM therefore includes an assessment of the functioning of wholesale
markets at national level, developing a revised series of metrics to assess
whether a wholesale market is ‘well-functioning’. These metrics are based on
the analysis of data and information not available when the first GTM was
drafted and can be grouped into two key characteristics of
markets:
They meet market participants’ needs:
products and liquidity are available that enable effective management of
wholesale market risk; and,
They have “market health”: the
wholesale market is demonstrably competitive, resilient and has a high
degree of Security of Supply.
The self-evaluation process
We propose that all Member States
assess whether they are likely to meet, or continue to meet, these revised GTM
metrics by 2017 (and every three years thereafter) in order to determine
whether their market will be well functioning. If it will not, the GTM suggests
considering structural market reforms. Three market integration tools have been
identified (this list is not exhaustive):
Full market merger: full merger of two or more
adjacent markets by merging their virtual trading points and balancing
zones;
Trading region: partial merger of two or more
adjacent markets at the wholesale level by merging their virtual trading
points and establishing a cross-border trading balancing zone;
and,
Satellite market: substantial linking (via pipeline
capacity) of a non-functioning gas market to a directly neighbouring,
well-functioning wholesale gas market.
Additional tools, including market
coupling, can have a beneficial effect by facilitating coordinated,
simultaneous access to capacity and spot gas markets.
Any reforms undertaken by Member
States should be based on an appropriate cost-benefit analysis to ensure their
economic viability.
The role of gas in complementing
renewable energy source generation
We believe that more can, and should,
be done to ensure that regulatory and market arrangements allow for more
efficient use of gas-fired power plants. We predict that significant gas-fired
generating capacity is likely to be needed to provide flexible back up to
renewable energy sources (RES) whilst also running at a far lower load factor
than was previously the case. To optimise the joint working of the electricity
and gas sectors, we propose that gas and electricity TSOs should be legally
obliged to cooperate with one another. This could include: (i) improved
information flows so that system operators and market participants benefit from
more timely information, allowing all parties to make more optimised
operational decisions; and, (ii) a cooperative review of gas and electricity
industry timelines, among other things.
New developments in the gas supply
chain
We have also considered new
developments in the use of gas. These include: (i) the intensification of gas
use in the transportation sector (in both liquefied (LNG) and compressed
natural gas (CNG) forms); (ii) small-scale applications of LNG and CNG,
including alternative means of distribution such as virtual pipelines; and,
(iii) pioneering technologies that facilitate the storage of electricity in the
form of hydrogen or synthetic gas (“power to gas” or
P2G).
As regulators, it is important that
we facilitate the emergence of these new uses of gas through appropriate and
limited interventions only. The areas we have considered in our review
include:
Clarification as to which of these
activities require regulatory intervention (in particular loading/bunkering
activities at LNG storage facilities);
Ensuring that LNG and CNG filling
stations are not considered as suppliers of gas, and consequently should not be
subject to third party access (TPA) or licensing
procedures;
Facilitating a level-playing field
between piped and non-piped supplies, so that gas-to-gas competition is
possible if the market demands it; and,
Particularly in the case of P2G, the
technical provisions for injecting hydrogen and synthetic gas in the gas
system, the pricing regime, the role of the P2G operators, the balancing aspect
and integration in the electricity system.
Conclusion
Our 2014 Market Monitoring Report
estimated that insufficient interconnection of wholesale gas markets led to a
gross-welfare loss of approximately EUR 7 billion in 2013. The implication is
that functioning European gas markets which meet the needs of EU gas consumers
are the exception rather than the rule in 2014, when the internal energy market
was due to be completed. Security of gas supplies is again the focus for
policymakers across the EU and the costs of dependence on a single supplier
have again been made clear. This revised GTM identifies how Europe can realise
its potential and reap the vast benefits of a secure, fully implemented
internal gas market for all its citizens.
