The discussion on a target model for European gas network access has been going on for a while now,officially starting with the conclusion of the 18th Madrid Forum in 2010 which invited “the Commission and the regulators to explore, in close cooperation with system operators and other stakeholders, the interaction and interdependence of all relevant areas for network codes and to initiate a process establishing a gas market target model”.
The desired target model shall provide a unifying vision on the future layout of the European gasmarket architecture. That vision shall assist all stakeholders in quickly and efficiently implementingthe 3rd energy market package on the internal gas market in a consistent way.
The following text describes a proposal for the European gas target model with a special focus on market architectures and investment.
The proposed gas target model is termed MECO-S Model.
The MECO-S Model is a Market Enabling, Connecting and Securing Model describing an endstate of the gas market to be achieved over time.
The MECO-S Model rests on three pillars that share a common foundation, the latter making sure that economical investments in pipelines are realized:
Pillar 1: Structuring network access to the European gas grid in a way that enables functioning wholesale markets so that every European final customer is easily accessible from such a market.
Pillar 2: Fostering short- and mid-term price alignment between the functioning wholesale markets by tightly connecting the markets through facilitating cross-market supply and trading and potentially implementing market coupling as far as the (at any time) given infrastructure allows.
The MECO-S Model aims at the creation of a number of functioning wholesale markets within the EU (together enabling easy access to all European final customers of gas), at connecting these markets tightly in order to maximize short- and mid-term price alignment between those markets, at enabling secure supply patterns to those markets and at making sure that all economic investments in gas transmission capacity are done.
Pillar 1 shall realize the goal of enabling functioning wholesale markets. Such markets are an essential feature of the internal market since they contribute to efficiency in managing gas and gasrelated assets such as supply contracts, storage and gas-fired power stations. Additionally and no less important such markets are an essential basis for retail competition. Finally, functioning wholesale markets are a basis for market based balancing and market coupling. Without functioning markets, both of these concepts could not be harnessed.
Pillar 1 is realized by structuring Europe into markets that are sufficiently large4 and well connected to sources of gas5 so that the emergence of a competitive traded wholesale market is likely. Where necessary with a view to that goal, member states have to create cross-border markets in order to increase market size and connectivity. Two models are presented to realize these markets, both based on the entry/exit regime:
. market areas, that implement integrated balancing zones reaching down to the final customers;
. trading regions that implement integrated wholesale markets which are tightly connected to national end user zones.
Both models may be used in parallel in Europe, whereby the market area model appears attractive for larger member states and the trading region model has specific merits for smaller member states that need to cooperate cross-border in order to gain sufficient market size and connectivity.
Pillar 2 aims at maximizing the efficiency of managing gas and gas-related assets on a European scale by making sure that the existing interconnecting infrastructure is put to the best use. The resulting tight connection of markets will lead to price alignment6 between European markets as far as the – at any time existing – infrastructure allows. Price alignment virtually unifies all European markets by enabling cross-portfolio optimisation via those markets on a European scale. Measures are foreseen so that TSOs do not suffer any loss from price alignment.
Pillar 2 is firstly realized by implementing hub-to-hub transport products and a number of harmonisation measures that make inter-market supply and trading significantly easier. The allocation of hub-to-hub transport products shall be by auction for the mid- and short-term markets and by first come first serve for the intra-day market.
Secondly it is proposed to implement pilot projects for day ahead market coupling to explore if the theoretical benefits of market coupling can be realized in practice for gas. If so, day ahead market coupling would become an integral part of the MECO-S Model.
Pillar 3 aims at enabling secure supply patterns to the European markets. Specifically Pillar 3 creates the preconditions for underpinning long-term supply contracts with appropriate transport products, taking into consideration that currently about 30% of all gas consumed in Europe crosses more than one border point. Additionally pillar 3 aims at providing a market based solution for realizing transport security of supply where collaboration with adjoining markets is required.
Pillar 3 is realized by foreseeing the execution (if demanded by shippers) of new long-term transport contracts. These contracts can be requested periodically in an open season style process for the full term of interest to the shipper, e.g. 15 years. If in the process the demand for long-term capacity proves higher than the availability of such capacities, then capacities will be expanded by investment if economical. In order to allow for such investment, the lead time for allocating long-term capacity shall always be at least as long as the time required for expanding capacity. Since in this structure capacity can always be expanded, long-term capacity is not a scarce good anymore and auctioning of that capacity can be avoided. Allocation questions at the fringe of the allocation problem can be solved by an optimisation procedure.
In order to deal with shippers interested in long-distance transport (e.g. from a European border point to the next but one market) link chain products are introduced. Link chain products are packages of (hub-to-hub) transport products at several border points on a continuous route that may be requested by the shipper as a whole and are allocated at the same level of capacity on all requested border points. After allocation they may be used as separate hub-to-hub capacities.
In the area of transport security of supply the instrument of the fallback capacity contract is introduced. It provides a means for member states to secure that sufficient capacity in a neighbouring market is made and kept available in order to cater to the security needs of said member states. Under a fallback capacity contract a TSO (A) of the member state in need of redundant transport capacity (as defined by a competent authority) books the required capacity long term with a neighbouring TSO (B). TSO B charges to TSO A only that part of the capacity that is not booked by shippers directly with TSO B (hence the name “fallback contract”). TSO A allocates the cost for this security measure to final customers in his market.
The common foundation of the MECO-S Model is economic investment. Investment aims at supporting the other pillars in realizing their respective goals e.g. in contributing to the creation of functioning markets (by new interconnection to these markets) or in contributing to improved price alignment between markets (by new/expanded interconnection between these markets). Several issues are discussed in the study regarding investment including the structuring of investment appraisal processes, the evaluation of investment in interconnection and intraconnection11 pipelines and the financing of investment.
The key results on investment are:
- Investment appraisal and the allocation of long-term capacity should always (even on existing systems) be an integrated process in the style of an open season (see also above under pillar 3)
- The quantity of capacity that shall be reserved for the mid- and short-term market shall be created (and hence invested) on top of any investment required to satisfy (economic) long-term capacity requests.
- The economic appraisal of investment shall take into account the return from long-term contracts as well as the value13 expected to be generated by price alignment due to the capacity reserved for the mid- and short-term markets. The cost for mid- and short-term capacities that are not directly recovered by tariffs shall be allocated to the beneficiaries.
In case TSOs declare that they can/will not invest in an otherwise economic investment project, the project shall be tendered to the market. The scope of the tender would be to build and finance the pipeline (or other asset) against a yearly fee paid long-term. After construction, the realized project would be integrated into the operational responsibility of the respective TSO.
Jean-Michel Glachant, Loyola de Palacio Professor in European Energy Policy, European University Institute
P.S. This blog is based on a EUI Working Paper RSCAS 2011/38 ROBERT SCHUMAN CENTRE FOR ADVANCED STUDIES, Florence School of Regulation