E Europe liberalises border trade [NGW Magazine]
Investment in new gas infrastructure and cross-border capacity expansions are suffering from waning investor confidence and reduced market interest across Europe. Shortcomings or gaps are particularly evident in eastern Europe, but also in southern Europe as exemplified by the once EU-backed MidCat pipeline between France and Spain which has been shelved for good on economic grounds – to the annoyance of Spanish industrial users.
A lack of expansions and new build can be mitigated by further development of virtual interconnection points (VIPs). VIPs aim to maximise cross-border capacity and market efficiency by grouping two or more interconnection points into one bookable platform. So far 16 VIPs have been established in Europe to date.
Moreover, Ukraine – a contracting party to the EU-managed Energy Community – has established virtual reverse flows on its borders with Hungary and Poland and temporarily also with Slovakia.
Fresh data from the Ukrainian gas TSO (GTSOU) shows that 4.7bn m³ of gas were imported via virtual reverse flows in the period January to August 2020, which was 38% of total imports. A total of 2.3bn m³ have been imported from Hungary via virtual flows, 1.6bn m³ from Slovakia and 0.8bn m³ from Poland. Virtual reverse flows became available for the first time this year. Meanwhile, total imports in the period stood at 12.5bn m³, up 30% year-on-year.
The virtual reverse flows have increasingly enabled shippers in Europe to take advantage of Ukraine's 30bn m³ of storage capacity. Gas storage facilities across EU countries are over 90% full on average thanks to the global supply glut and demand crash. The ability to put more gas into Ukrainian storage -- which has further been boosted by attractive tariffs -- means storage there is now around 85% full, according to transparency data published by Gas Infrastructure Europe (see box).
Slovakian border issues
However, the virtual reverse flow agreement on the Ukrainian-Slovakian border is only temporary and follows a dispute after Slovakian TSO Eustream complained that the Ukraininan TSO had given too short notice with regards to maintenance work on a minor pipeline. On September 1, GTSOU started repair works on the 42.5mn m³/day Budince section of the Luping-4 gas pipeline which it plans to complete by September 21.
In the end it was agreed that during the repair works, import capacities will be available at the much larger 200mn m³/day Uzhgorod-Velke Kapusany interconnection point, also on the Ukrainian-Slovakian border. GTSOU said the virtual reverse flows more than offset the temporarily unavailable capacities at Budince.
It is worth noting that EU and Energy Community nations are not obliged to implement virtual flows on their borders. Current EU rules only apply to borders between EU countries.
“There are still issues on the Slovakian-Ukrainian border, however both sides are already doing more than they are obliged to under the current regulatory regime. Ukraine, as a contracting party to the Energy Community, is very eager to implement VIPs on its borders, including with EU countries,” the head of the gas unit at the Energy Community Predrag Grujicic told NGW.
Ukraine has the aspirations to become a regional gas hub, and there are reasons to be optimistic that it will succeed after having implemented a number of market reforms in recent years.
“Ukraine is a relatively advanced, big market with an independent transmission system operator. It has a lot of domestically produced gas and several European traders have entered the market. In the future, it could also import Black Sea gas from Romania. It has the potential to one day become a gas hub,” Grujicic said.
The EU’s network code on capacity allocation mechanisms (CAM) required VIPs to be established on borders across the EU no later than November 2018. Of the 16 or so VIPs established in the EU, 11 connect the German gas markets – Gaspool and NetConnect Germany – with neighbouring countries. There are also VIPs on the Spanish borders with France and Portugal; and between the FrenchBeLux and BeLux-Netherlands markets.
According to EU regulatory body Acer, many of the VIPs were established after the deadline, owing to uncertainties about how to handle existing contracts. About one-third of the VIPs apply virtual flows to both existing and future contracts. Acer said all the delays have made it difficult to evaluate the impact of VIPs so far.
“Due to the delayed implementation, it is too early to draw lessons on how VIPs
impacted the EU gas markets and if they are effectively facilitating cross-zonal trading,” Acer said.
However, the example of Ukraine shows VIPs make it easier for shippers to access grids and that they can be instrumental in boosting market liquidity. In total, 72 traders booked gas transmission capacity from the EU to Ukraine in January-August, comprising 45 Ukrainian companies and 27 foreign companies.
Increased market efficiency on the back of VIPs should also help mitigate the lack of investment in cross-border capacity. To this end, recent analysis carried out by Acer suggests there is little interest from market players in expanding gas networks in Europe.
For example, the economic test for expansion of the Uberackern 2 / Uberackern Sudal cross-border interconnection point between Germany and Austria did not result in any bookings from market participants, according to Acer’s analysis. The same was the case for the Mosonmagyarovar interconnection on the Hungary-Austria border. A market test for new capacity between Hungary (Balassagyarmat), Slovakia (Velke Zlievce) and increased capacity at Austria’s Baumgarten also failed.
“The lack of sufficient conversion of non-binding demand expressions into actual capacity contracts may hint that no additional capacity is needed for market reasons and that network users in today’s gas market may have insufficient incentives to express their true interest,” said the Acer report. It also noted that contractual and physical congestion in today’s European gas markets were at low levels. Moreover, market players may anticipate lower demand for gas owing to EU climate objectives. Acer said it was difficult to draw firm conclusions from the analysis.
But VIPs by definition can only work where there is at least some capacity to be aggregated and there are still some gaps in the hardware, Acer notes in a separate report. It says progress seems to have slowed when it comes to building new interconnectors. Many EU-backed gas projects of common interest are not “shovel ready,” meaning that they often fulfil the criteria to receive EU grants and speedy regulatory approvals, but lag behind on quality project planning and non-subsidised finance.
For example, the planned 1.2bn m³/year Malta-Italy gas interconnector – which would end Malta’s isolation from the European grid – has been delayed until at least 2025 owing to financing and environmental issues, Acer reported. Malta is now wholly reliant on LNG imports.
Expansion of transmission capacity on the border between Hungary and Slovakia also appears to have stalled. Plans for a new 5bn m³/year interconnector between Croatia and Slovenia and a 2bn m̞³/year interconnector between Slovenia and Hungary also look uncertain.
Meanwhile, the 3bn m³/year Interconnector Greece-Bulgaria has also been pushed back due to financing issues, but is nevertheless expected to be commissioned next year. Moreover, the EU-backed 2.4bn m³/year Poland-Lithuania interconnector is on schedule to be completed in December next year. These projects are sorely needed to further integrate the EU gas market in an area.
Ukraine storage gains on reverse flow
Ukraine's storage stocks have risen steadily since the agreement between the Slovak and Ukrainian transmission system operators, allowing virtual reverse cross-border flow at Velke Kapusany since July. The scheme however is due to end October 1.
Last year, there were 196.3 TWh in Ukrainian storage on September 6, meaning the facilities were 60.5% full, an increase on 2018. The motive for injection last summer was to provide a hedge if flows from Russia failed for any reason that winter – there was still no transit agreement with Ukraine.
This year the injection rate is higher thanks to the reverse flow at Velke Kapuszany coupled with the arrival of cheap gas looking for a home. As of September 6 there were 278.4 TWh in store, meaning the facilities were then 85.2% full. By contrast, last year the facility peaked at 228 TWh around November 2.
Between August 6 and September 6, injections rose by 36 TWh, compared with 26.7 TWh between July 6 and August 6, and just 21.1 TWh between June and July, before the reverse flow was created.
In aggregate then there are already 1,300 TWh at Europe’s (and Ukraine’s) disposal for this winter. And the final total will be even higher by the time the withdrawal season starts, which is normally late in October.
Ukraine's total working gas capacity is 320.3 TWh but that has not been needed for decades, when it belonged to Russian gas monopoly Gazprom. Gazprom no longer uses storage there.
Europe's gas storage facilities overall were 92.2% full September 8, with 1,024 TWh injected out of a total possible 1,110 TWh. There are another two months or so of injection still remaining, although as the pressure in the facilities reaches maximum the injection rate slows down. Most of the storage, by volume, was in a handful of countries with the biggest capacity, if not the highest percentages: Germany, France, Italy and the Netherlands between them accounted for some 644 TWh or 58% of the total, as of that date.
Not all the excess LNG has ended up in European storage: power generation has used more gas in a number of countries this year than last, again owing to the low price relative to competing fuels. Its price advantage is increased by the carbon emissions price, which weighs more heavily on coal. The August heatwave in the UK also saw gas account for a big chunk of the generation mix for some weeks, until the September winds came.
But demand generally has been lower, owing to lockdowns affecting industrial output and to the mild weather in January-March. Europe's biggest gas consuming country Germany, for example, took 4.6% less gas overall in the first half of the year than it did in the same period last year, according to analysis by German analysts Ageb.