Gas Target Model (in EN)
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The document outlines the 'mecos' target model proposed by the Florence School of Regulation, aimed at enhancing the European internal gas market by fostering functioning wholesale markets, improving cross-border trade, and ensuring security of supply. It delineates the pillars of the model, which focus on enabling functioning markets, tightly connecting these markets, and establishing secure supply patterns through strategic infrastructure investments. The model aims to align prices across markets, enhance competition, and ultimately maximize efficiency and public welfare in gas trading within the EU.
Gas Target Model (in EN)
- 1. Florence School of Regulation A ‘Target Model’ for the Internal Gas Market Jean-Michel Glachant Director Florence School of Regulation & Professor “Loyola de Palacio EU Energy Chair” AEEG, Roma 2 February 2012 1
- 2. Gas Target Model: What‘s? *A non biding vision of the European Internal Market in 2015-2020… …which gives consistency to issues addressed in ACER “Framework Guidelines” and ENTSOG “Grid Codes” ... as Third Package does not *The starting point is the use of “entry/exit zones” as the regulated basis for the European Internal Market (the whole EU market has this regulated basis) *This choice implies that a number of regulatory questions must be answered in order to conceive the Framework Guidelines or implement the Grid Codes 2
- 3. OVERVIEW OF THE MECOS TARGET MODEL MECOS Model Pillar 1 Pillar 2 Pillar 3 Enable functioning Tightly connect Enable secure wholesale markets these markets supply patterns Common foundations Improve market effectiveness by realizing economic pipeline investments 3
- 4. The Logic for FSR MECOS Target Model “MECOS” stands for: “Market Enabling and Connecting for Secure Supply” Florence School’s “MECOS” aims at improving cross-border trade. It proposes answers to questions posed by European markets integration : Short-term: Enabling functioning markets within and across national borders Long-term: Connecting these markets through contracts and capacity reservation Security of supply: Permitting long term contracting + pushing some investments defined as national or EU priority + easy short term flows 4
- 5. MECO PILLAR 1 ENABLE FUNCTIONING WHOLESALE MARKETS • “Functioning” wholesale markets essential for: – Fostering supply competition – Efficient use of gas assets (incl. procurement contracts, storage, or LNG terminals) • “Functioning” markets cannot be replaced by tightly connected “non-functioning” markets. Effects on supply competition and market efficiency never be the same. 5
- 6. MECO PILLAR 1 (Cted) ENABLE FUNCTIONING WHOLESALE MARKETS • MECOS creates structural conditions for functioning markets by arranging “entry/exit” pricing zones: – Large enough to be interesting for a substantial number of wholesalers (minimum of 20 Bcm) – Well connected to other markets and supply sources (as with 3 different gas sources) 6
- 7. Pilar 1 (Cted): ARCHITECTURES TO ENABLE FUNCTIONING MARKETS • To create structural conditions for functioning markets, two architectures foreseen in MECOS: – 1. Market Areas (complete market fusion) • i.e. a single entry/exit price zone + single “balancing zone” from import points to end- users, either structured as: *National (if “functioning Wholesale markets” can be achieved stand alone); or **Cross-border (if cross-border cooperation is required to achieve “functioning Wholesale markets”: 20 Bcm + 3 gas sources) 7
- 8. ARCHITECTURES (Cted) • To create structural conditions for functioning markets, a second architecture foreseen in MECOS: – 2. Trading Regions (Balancing being left apart) • i.e. a single cross-border price zone (entry/exit) for wholesale markets with congestion-free interconnection • BUT balancing zones left to several national end-user zones. 8
- 9. MECOS PILLAR 2: To TIGHTLY CONNECT the FUNCTIONING WHOLESALE MARKETS • Tight connection between the several EU “functioning markets” essential for: – price alignment between adjoining markets, – driving market efficiency and public welfare on a European scale, and – improving market liquidity and increasing competition, reducing market dominance • The MECOS model foresees a number of measures in order to connect all European markets, differentiated by time horizon 9
- 10. Pillar 2 (Cted): ENHANCED TRADING CONDITIONS • “Enhanced Trading Conditions” ETC (Economize Transaction Costs!) are measures to be implemented foremost in the ENTSOG grid codes in the areas of: – Capacity Allocation Mechanism / Congestion Management Procedure open seasons, VP2VP-products, coordinated auctions for longer term capacities, FCFS for the intra-day market, harmonized contract start dates, standards for secondary capacity trading… – Nomination and Balancing common gas day, harmonized nomination schedules, limits on re-nomination, … – Tariffs harmonized date for change of tariffs, structure methodology (cf. transit), inter-TSO compensations within large zones – Gas quality to enable bidirectional flow at all border points 10
- 11. Pillar 2 (Cted): METHODS FOR CONNECTING MARKETS IN MECOS MODEL 15Y Long term market From 15 years horizon to 1 month: 1Y Mid term market Cross-market trading furthered by 1M Short term market “Enhanced Trading Conditions” Day Ahead Market Coupling if proved 24H Day ahead market feasible + C-M Trading furthered by “ETC” Cross-market trading furthered by 4H Intra-day market “Enhanced Trading Conditions” 11 * i.e. by shippers
- 12. MECOS PILLAR 3: ENABLING THE ESTABLISHMENT OF SECURE SUPPLY PATTERNS • To cross several markets “Link-chain” products should be auctioned allowing the sale of capacity in combined border points • These products may have different durations (LT to ST) • For security of supply purposes, TSOs may buy capacity in adjacent systems (“fallback” contracts: TSO country “A” pays for capacity in country “B”) 12
- 13. MECOS 4: COMMON FOUNDATIONS REALIZING ECONOMIC PIPELINE INVESTMENTS • Investments between markets for interconnections – “open seasons” with pre-set evaluation criteria (can go down to xx% booking) – regulatory authority could add more capacity for *security of supply or **openness of market (incl. short term) • Investment within markets (in a pricing zone), to be evaluated against congestion costs 13
- 14. MECOS MODEL (1 to 4): Overall BENEFITS Once a MECOS Model-like implemented: – All European end-users linked to a functioning wholesale market. • These markets enable supply competition because they provide easy access to competitively priced gas and are basis for proper risk management. – Prices across wholesale markets to be aligned as much as possible • This should maximize efficiency and public welfare in / from trading on a European scale by making sure that gas assets (procurement contracts, storage, …) are used in the most economic manner. 14
- 15. Beyond MECOS: 3 key questions addressed by gas target models 1# Short-term coordination “Entry/exit” system needs particular mechanisms to bridge the gap between “commercial network” and “physical network” 2# Long-term coordination Connection between several EU market zones is badly needed and this requires mechanisms to allocate the network capacity 3# Investment and security of supply Improving connection between markets has to come with mechanisms securing European gas supply (notably: entry of Foreign gas in EU) 15
- 16. Four other Target Models proposed: CIEP – Frontier Economics – LECG - EURAM ¤ Capacity Allocation for Short-term Cross-Border *CIEP, Frontier Economics and LECG do not propose any new important regulatory change **EURAM supports “implicit allocation” (market coupling) in specific cases (whether inefficiency of capacity allocation is higher than transaction cost) ¤ Capacity Allocation for Long-term Cross-Border *All models have a consensus in “explicit allocation” **EURAM propose a new mechanism “Open Subscription Procedure” 16
- 17. Various Target Models (Cted) ¤ Investment on Cross-Border Capacity *CIEP, Frontier Economics and LECG propose cross border investment through bilateral contracts and open season **EURAM propose long term contracts through a bidding centralized mechanism: ‘Open Subscription Procedure’ ¤ EU Security of supply CIEP, Frontier Economics, LECG and EURAM rely on long term contracts 17
- 18. Model Proposals on Investment and Long Term Proposals on Short Term Capacity Capacity Allocation Allocation MECOS • Long term contracts with open season • Implicit allocation (Glachant • The NRAs keep a right to influence investment • Coupling or merging markets capacity • Development of virtual hubs # CEER) - to guarantee capacity in the short term - to guarantee SOS objectives Overview ofcentralized process •Explicit allocation • Long term contracts under alternative proposals EURAM (Ascari) the ‘Open Subscription Procedure’ - Contracts – with tariffs – American kind - Allow all players express their preferences (Open Subscription Procedures) - Allow public institutions to buy capacity • Limited role of implicit auctions in day- ahead adjustment CIEP • Long term contracts • Explicit allocation (Dutch hub) - Open season Procedures - Auction for capacity allocation - Merchant Procedures LECG • Long term contracts (OFGEM) - Investment decisions based on open season • NEW: Implicit Allocation Intraday - The TSO receive the capacity auctions revenue + • Cross Border Explicit Allocation an additional system charge to adjust the TSO - Bundle Products exit/entry on cross returns border - UIOLI Frontier • Long term contracts • Cross Border Explicit Allocation Economics - Low regulatory intervention on cross- border - Auction of capacity allocation –sharing contracts (supply oligopoly: no sweet to fringe) cost recovering between entry/exit capacity (Gdf-Suez) - TSO decision under regulation at national level - Make available C-B residual capacity (vertically integrated utility: revenue guaranteed) - Congestion management procedure 18