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:
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They meet market participants’ needs: products and liquidity are available that enable effective management of wholesale market risk; and,
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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):
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Full market merger: full merger of two or more adjacent markets by merging their virtual trading points and balancing zones;
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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,
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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:
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Clarification as to which of these activities require regulatory intervention (in particular loading/bunkering activities at LNG storage facilities);
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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;
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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,
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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.
