A TARGET MODEL FOR THE EUROPEAN
NATURAL GAS MARKET
***
Preliminary Outline
Jean-Michel Glachant & Sergio Ascari
Florence School of Regulation
European Energy Regulators' 2nd Workshop on
Target Model for the European Gas Market
Bonn, 22 February 2011
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THE EUROPEAN GAS TARGET MODEL

A research project developed by
– Florence School of Regulation
– Clingendael International Energy Programme
– Wagner, Elbling & Co.

with support from:
– E-Control, Gmbh
– Bundesnetzagentur
– Net4Gas
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PART 1
GAS TARGET MODEL
ARCHITECTURE
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MARKET ARCHITECTURE: OVERVIEW
• Multiple market zones
– TM will not define how many / which zones
– Mergers to be encouraged as larger zones
would increase market competition and
supply security
– Zones may merge if economically
reasonable
– Too large zones (like a single EU zone)
would entail unacceptable cross subsidies
– Zones must be market capable
– Architecture fully consistent with regional
approach recommended by Security of
Supply Regulation (No. 994/2010)
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THE MECO MODEL (1)
• The MECO model is a proposal for the European
Gas Target Model
• MECO is an acronym for:
Market Enabling and Connecting
• The model focuses primarily on issues that can
be addressed in framework guidelines and the
ENTSOG network code
• The status of the model is preliminary
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OVERVIEW OF THE MECO MODEL FOR
EUROPEAN GAS MARKET INTEGRATION
MECO Model
Pillar 1:
Enable functioning
wholesale markets
Pillar 2: Tightly
connect functioning
wholesale markets
Pillar 1: Structuring of the European gas grid in a way that enables
functioning wholesale markets, so that every European end-user
is served by such a market.
Pillar 2: Connection of the resulting functioning wholesale
markets by significantly facilitating cross-market trading
especially in the forward markets and implementing market
coupling of day ahead markets to align market prices as closely
as the given infrastructure allows.
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DEFINITION OF “FUNCTIONING
WHOLESALE MARKETS”
A functioning wholesale gas market is:
• a single price zone
• accessible to incumbents and new entrants on
equal terms
• where trading is liquid - vivid and resilient at the
same time
• it creates reliable price signals in the forward
and spot markets
• no trade - even if substantial - shall distort the
market price
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MECO PILLAR 1: ENABLE FUNCTIONING
WHOLESALE MARKETS
• Functioning wholesale markets are essential for:
– Fostering retail competition
– Efficient use of gas assets (procurement contracts, storage, etc.)
• Functioning wholesale markets can not be replaced by
tightly connected non-functioning markets. The effects
on retail competition and market efficiency would never
by the same.
• The MECO model creates structural conditions that
enable the emergence of functioning markets by
arranging price (entry/exit) zones that are:
– Large enough to be interesting for a substantial number of
wholesalers
– Well connected to other markets
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ARCHITECTURES TO ENABLE
FUNCTIONING MARKETS
• In order to create the structural conditions for the
emergence of functioning markets, the following
alternative architectures are foreseen in the MECO model:
– Market Areas
• i.e. a single price (entry/exit) and balancing zone from the import
points to the end-users, either structured as:
• National market areas (if functioning wholesale markets can be
achieved stand alone); or
• Cross-border market areas (if cross-border cooperation is
required to achieve functioning markets)
– Trading Regions
• i.e. a single cross-border price (entry/exit) and balancing zone for
wholesale markets with congestion-free interconnection to national
end-user zones.
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THE MARKET AREA MODEL
Country A
Features:
• One virtual point for trading
• Fully integrated wholesale market
• One balancing zone from import
points to end-users
• Single balancing entity
• Single set of balancing rules
Market Area A
VP
National
market
area
Transmission systems
Ex
Distribution systems
Country A
Country B
Legend and Symbols
Market Area AB
Ex
Interconnection capacity between
transmission and distribution systems in the
market area (not bookable by shippers)
IC
Cross-border interconnection capacity in
the market area (not bookable by shippers)
VP
Crossborder
market
area
Virtual point of the market area serving as
the sole marketplace of the market area
Transmission systems IC Transmission systems
Ex
Distribution systems
Ex
Distribution systems
VP
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THE TRADING REGION MODEL
Features:
Country A
Country B
Trading Region AB
•
One virtual point for trading
•
Fully integrated wholesale market
•
End-users are balanced in
national end-user zones that may
reflect national specifics
•
End-user balancing may be done
by national balancing entity
•
Congestion-free interconnection
between trading region and enduser zones through the common
virtual point
VP
End-user zone A
End-user zone B
Legend and Symbols
Trading Region AB = Cross-border entry/exit system including all nominated points on the transmission systems of countries A and B
End-user zone = National balancing zone for national end-users, no matter the system (distribution or transmission) they are connected to
VP
Virtual point of the trading region serving as the sole marketplace of the trading region and all attached end-user zones. Shifting of gas
between trading region and end-user zone is done by nominating a virtual exit on the VP.
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MECO PILLAR 2:
TIGHTLY CONNECT FUNCTIONING
WHOLESALE MARKETS
• Tight connection between functioning wholesale
markets is essential for:
– price alignment between adjoining markets, thereby
driving market efficiency and public welfare on a
European scale
– improving market liquidity and increase competition,
reducing market dominance in each & joint markets
– enhance interconnecting infrastructure where
necessary and economically justified
• The MECO model foresees a number of
measures in order to connect markets,
differentiated by time horizon
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CONNECTING THE ZONES (1)
• Sell long term capacity by rolling auction /
open seasons
–
–
–
bundled across transmission systems
coordinated across adjacent transmission
systems and along routes
invest to increase capacity if market willing
to pay for it
• Sell at least 10% of total capacity on short
term basis by auctions
–
–
–
–
bundled, coordinated
yearly, monthly and intermediate products to
be available
enforce commercial / physical reverse flows
cap LT (>5 years) capacity contracts to 75%
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CONNECTING THE ZONES (2)
• Implement strict congestion management
procedure
–
process already under way
• Any firm capacity available / released after the
CM procedure is transferred to DA markets
• DA capacity may be directly auctioned off or
transferred to gas exchanges for an implicit
auction (volume or price coupling, market
splitting)
• Any unused capacity left from DA may be
allocated intra-day (1st come 1st serve)
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METHODS FOR CONNECTING MARKETS IN
THE MECO MODEL
Time horizon
Connection by …
Long term market
Open Seasons, Cross-market trading
furthered by Enhanced Trading
Conditions
Mid term market
Cross-market trading furthered by ETC
Short term market
Day ahead market
Intra-day market
Market Coupling
1st come 1st serve, furthered by ETC
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ENHANCED TRADING CONDITIONS
• Enhanced trading conditions (ETC) are a package of
measures to be implemented foremost in the ENTSOG
network code in the areas of
– CAM/CMP (e.g. 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 (e.g. common gas day, harmonized
nomination schedules, limits on renomination, …)
– Tariffs (e.g. harmonized date for change of tariffs, structure
methodology, inter-TSO compensations within zones)
– Gas quality (in order to enable bidirectional flow at all border
points)
– Gas year sessions (co-ordinated LT auctions / open seasons,
short term capacity auctions, seasonal storage booking)
• The details of the ETC package are still under
development.
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DAY AHEAD MARKET COUPLING
VP
VP
IC
Market 1
Market 2
Adjoining day ahead spot markets (organised as exchanges
operating on the virtual point) are connected by an
administrative process in the course of which gas is bought in
the cheaper market and sold in the pricier market, with the goal
of price alignment and within the capacity limits of the
interconnection capacity available to the market coupling
process.
Market Coupling may involve several member states at once.
Legend and Symbols
IC
VP
Interconnection capacity between markets
Virtual point of the market
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THE ROLE OF MARKET COUPLING
• Not a general model, but an option limited to
daily capacity allocation
• Most trading likely to remain based on long term
contracts, with increasing role of short term
• More benefits from MC expected in power
markets, where congestion issues are common
• Market coupling untested in natural gas
• Generalised usage unlikely for several years, no
meaningful target dates
• MC usage a valuable goal, as it leads to optimal
capacity allocation and price alignment
whenever justified
• MC to be allowed and encouraged
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MECO MODEL:
ARCHITECTURE AT LARGE
Country C
Country D
Market Area CD
VP
Country A
Market Area A
VP
Country E
Country F
Trading Region AB
VP
Country B
End-user zone E
End-user zone F
Market Area B
VP
Legend and Symbols
VP
Virtual point
Connection between markets (facilitated by enhanced trading conditions and day ahead market coupling)
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PART 2
GAS TARGET MODEL
VISION, GOALS,
CONSTRAINTS, CRITERIA
AND NEXT STEPS
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WORKING METHOD
• Top-down approach
• Outlining:
− political goals
− legal constraints
− problems to be solved
− Criteria for success
• Providing a target model vision (architecture)
• Outlining its main consequences for
integration areas (Capacity Allocation,
Congestion Management, Balancing, Tariffs,
Investment, Interoperability, Operational
Procedures)
• Exploring links and relationships between
the areas
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POLITICAL GOALS OF THE GTM
• Sourced from legislation recitals, official
documents:
−
−
−
−
−
to establish an internal market in natural gas
to remove restrictions on cross border trade
to ultimately achieve efficiency gains
to promote competitive prices
to contribute to security of supply and
sustainability
− to ensure that Europe remains an attractive outlet
for external supplies
− to foster market integration
− to reach an appropriate level of cross-border gas
interconnections capacity
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LEGAL CONSTRAINTS
• Entry-exit systems required
• Cost-reflective tariffs providing incentives to
invest or value-reflective auctions
• Endeavour to harmonize balancing regimes,
streamline structure & level of balancing
charges
• Promote coordinated allocation of cross
border capacity
• Mandatory market based CA/CM
• Implicit auctioning explicitly allowed for
short term allocation
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OUTSTANDING PROBLEMS
• Uneven, un-coordinated capacity access allocation
• Ineffective congestion management
• Low transparency and no harmonization of entryexit tariff setting criteria
• Limited coordination of operational procedures,
lacking IPAs/OBAs
• Lack of open season co-ordination and decision
criteria
• Uneven status of hubs, exchanges and their liquidity
 Reduced market competition, as problems are
solved by horizontal & vertical company integration
 Reduced investment, security of supply
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CRITERIA FOR SUCCESS
• Price convergence, after allowing for
marginal transmission costs
–
hitherto achieved only in NW Europe
• Liquidity: ability to buy and sell at market
prices, from exchanges or long term
contracts
–
satisfactory only in British NBP
• Ability to reserve capacity for valuable trade
in the short term and to reserve / expand
capacity in the long term, including new
infrastructure development
–
uneven, fragmented, no level playing field
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MECO MODEL: BENEFITS
Once the MECO Model is implemented:
– All European end-users will be served by a
functioning wholesale market.
• These functioning wholesales markets will act as enablers
and fertilizers for retail competition because they provide
easy access to competitively priced gas and are the basis for
proper risk management.
– Prices between these wholesale markets will be
aligned as much as possible
• This will maximize efficiency and thereby public welfare in /
from trading on a European scale by making sure that all gas
assets (procurement contracts, storage, …) are used in the
most economic manner.
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MECO MODEL: OPEN ISSUES
• The research team is still working on a number
of open issues including:
–
–
–
–
–
–
–
–
–
Integrating security of supply considerations
New infrastructure
Within day markets
The role of storage in the model
The role of LNG in the model
Balancing requirements
Tariffs
Operational procedures
Interoperability
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STORAGE & LNG TERMINALS:
EVOLUTIONARY VIEW
• Storage facilities and LNG terminals are no natural
monopolies
• Negotiated access and TPA exemptions common in
EU Member States
• Essential facility doctrine, factual monopoly led to
regulated TPE in several MS
• Market integration likely to reduce monopoly power
of remaining regulated facilities
• Phasing-out of regulation to be foreseen as criteria
for markets integration are me
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NEXT STEPS
• Some more detailed description of the Target
Model
• Addressing the main harmonisation areas
• Exploring links between areas
• Outlining further monitoring requirement
• Discuss implementation steps and
requirements
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THANKS FOR YOUR ATTENTION!
COMMENTS WELCOME TO:
Gas.TargetModel@eui.eu
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