[NGW Magazine] Regulating Europe’s gas markets

This article is featured in NGW Magazine Volume 2, Issue 13.

The EU’s energy regulator is unhappy with the rate of projects of common interest but happy with market convergence – and Shell just wants markets.

The head of the gas division of the European Union’s Agency for the Co-operation of Energy Regulators told a session at the Gas Infrastructure Europe conference mid-June that a soon-to-be-released second report on projects of common interest (PCIs) gives grounds for concern: deadlines are being missed, budgets overrun. Dennis Hesseling said analysis shows that most projects start one year later than originally planned. “That doesn’t sound like realistic or ambitious planning,” he commented, and overall, the list of PCI’s does not seem very realistic.

In terms of the costs involved, he said that in key years when project stakeholders claim they will be investing significant amounts of money in new transmission, storage or LNG facilities, whose average costs were around €10bn ($11.4mn)/year, and the average spend of PCI projects going back two years shows an average spend of just €3bn/yr. The more than three times increase in spending he said was “huge” and something that cast doubt on the selection process for the PCIs – some of which Hesseling suggested might not be implemented.

Acer has however isolated the biggest barrier to gas trade: it costs too much to ship gas, he said, based on discussions Acer had held with stakeholders. “In a way this is logical, because no one wants to pay a price for something they need if it is too expensive; at the same time, we see it could be a real barrier in combination with a second barrier: they don’t seem to see competitive short-term capacity products, which is a bit worrying because we have put a lot of effort, at least on the interconnection point side, to make sure there are indexed products available through an open process.”

Insufficient regulatory transparency, the said, is the third barrier, one which is easy to address. Referencing the Quo Vadis study’s objective to answer whether or not there is a need to change the regulatory framework, Hesseling reported that many of the regulatory measure are delivering to some extent, with network codes having been established that are now being implemented and adopted by member states. Some have said that it is only when the network codes have had time to bed down that the success or failure of the market will be clear. But there is time for this: “The assumption of the study is that the Third Energy Package (TEP) should be adopted by 2020,” he said; that will be the time to decide if changes are needed.

Hesseling also showed a slide of gas supply diversification across the European Union (Figure 1). He said the slide was one way to track how EU member states are doing in terms of source diversification. 

Member states with fewer source options, Hesseling said, have a much more difficult situation as one source of gas makes it difficult to create a properly functioning market, but he added there were regulatory moves that could be used toward that end.

Evaluating price convergence

Acer has also tracked price convergence between different gas hubs and found better alignment over time (Figure 2). Those in orange exhibit a price difference of less than €1/MWh; those whose price difference was between €1 and €3/MWh in light blue; and those whose price difference was more than that: these included Slovenia, Croatia and the Baltics.

A map of 2015 showed that the orange area had spread, meaning the price of gas for more European countries had more closely approached the Dutch Title Transfer Facility price – now the most liquid hub in Europe. “And that’s what we’re looking for – we’re trying to expand the area where the prices are aligned with the best price you can get in Europe,” he explained.

However, Hesseling conceded that this development did not occur solely as a result of regulatory measures. Other factors that came into play include infrastructure investment, reverse flow, the oil price and LNG pricing. “They all come together.” For 2016, he said the preliminary numbers for spreads are narrowing of the spread between hub and long-term contract prices.

“There are still parts of Europe where the current framework we think is delivering pretty good results. There’re also parts where it’s still lacking and more needs to be done. The question is, ‘what can we do from a regulatory perspective?’”

Hesseling said the European Commission was trying to promote regional market integration. “If you have a country whose market is too small, and you can’t create sufficient levels of competition by yourself, it makes sense to try to, one way or another, link up with one or more neighbouring markets, fully merging to become one bigger injection zone,” he offered, among other suggestions like setting up a free trading region whose balancing is separate, but such efforts require a lot of support as they are cross border and so run into national government conflicts.

A commercial perspective

As to the question of whether gas market design should be redesigned to make it more attractive and competitive, Shell Energy Europe’s regulatory affairs head Giuseppina Squicciarini lauded the progress made so far, but pointed to some areas in need of restructuring. She said: “The ‘EU gas house’ has gone through quite a lot of renovation already and quite a lot of rebuilding through the TEP and the network codes. The new security of supply regulation will be an important, significant addition to this major construction project.” As a major supplier, trader and marketer of energy commodities including gas, she said Shell Energy Europe has operations in over 20 European countries and is active in all of the key gas and power markets. Suppliers of pipeline gas and LNG need three things:

• Access to gas demand through deep and liquid markets

• Access to networks

• Security of gas demand.

Regarding access to gas demand, in northwest Europe she reported that the rebuilding has largely taken place, with TEP implemented. “The region is characterized by well-functioning, liquid wholesale traded markets that enhance competition, provide access to demand and help deliver security of supply by providing a robust price signal to attract more supplies when needed, including LNG,” she said.

While no “rebuild” is needed there, Squicciarini added that important “renovation” could take place there through network code implementation, allowing for regulatory market design that can fulfil high-level policy objectives such as improving the ability of the EU to attract LNG. In contrast, she named south and east Europe as places where the building of an attractive and competitive gas market is just now beginning to taking place. She said: “There are a number of countries in southern Europe that have started taking the opportunity to implement the TEP and the network codes to create trading points, and they’ve made very good progress at that.”

Still, she said more work needs to be done there to increase the flexibility of those markets, adding that infrastructure already in place in southern Europe could prove useful to those ends, like LNG terminals in Spain or gas storage in Italy or France.

For eastern Europe, which Squicciarini said is in the early stages of development, the EC is putting a lot of effort into using the network codes and TEP as building blocks for construction of those markets. Shell, she said, supports the issue and believe it essential to work on removing barriers to trade there. “Security of supply is a very legitimate concern, but it should not be used as a way to block trade or frustrate the building of markets,” she commented.

Drew Leifheit