Designing or Modeling (Markets?) for Gas

FSR Summer School 26 June 2012

Jean Michel Glachant (Michelle Hallack & Miguel Vazquez)

Florence School of Regulation and Loyola de Palacio Chair European University Institute

SUMMARY 1) Introduction: to start with a market design? Why? 2) First decision: who designs the network services? 3) Second decision: given TSO, who allocates network services? 4) Then: how “entry/exit zones” design cross-border market? 5) Conclusion: liquidity inside and the rest outside?

1. Introduction

To start with a market design? Why? 1. The basic industry chain 2. Simplification of that chain 3. Open access to pipelines

1.1 Basic natural gas industry chain

Production Gathering system Processing Transportation Distribution Consumption

Storage Storage

Producer

Consumer

Producer B

Consumer B

1. 2 Simplification of that chain

8 in the morning

Producer A

Consumer A

Consumer B Producer

B

We need some simplification to make the trade feasible

Producer A

Consumer A

Consumer B Producer

B

8:07 in the morning

1. 2 Some simplification?

1.3 Open access to pipelines • Different people using the same infrastructure

• If everyone is using it without coordination with others, the resource is used inefficiently ― “Commons” dilemma

• We need to define some limitations to the use of the network: strict bilateral contracts (Airplane rule) or swimming pool access rule?

2. First decision: who designs the network services?

Bilateral contracts (USA) versus TSOs (EU, Australia) 1. Introduction 2. Network access and usage defined by contracts 3. Network access and usage defined by guidelines

2. First question: Who does the simplification? 2.1 Introduction • Two possibilities

― Contracts owners with users: market forces define the simplification

― Guidelines frame the use of the network: a regulator defines the simplification

• First choice: “Contract” carriage vs. “common” carriage ― USA vs. EU

2.2 Network usage by contracts

User A User B

Products to be traded are defined by bilateral agreements

Players are responsible of all definitions they need

Owner

Contract Contract

2.3 Network usage by guidelines

Single Point

Single Point

Gas over a day (or an hour, or a week, or…) Day 1

Producer A

Consumer A

Consumer B

Producer B

Single Point

Day 2

Net injection Net withdrawal Net injection Net withdrawal

• Too many contracts for usage → Do less contracts • Pipelines maybe monopolists → Regulated operator (TSOs) • Small players have problems with time variability →

Centralize the management of time variability (“time” level playing field inside the pipes)

2.3 Network with guidelines EU Solutions

Producer A

Consumer A

Consumer B

Producer B

Single point

Single Point

Net withdrawal Net injection

We need a balancing mechanism to bridge

the gap

2.3 Network with guidelines What else for the rest of the grid?

3. Second decision: given TSO, who allocates network services?

Explicit allocation (EU) versus Implicit allocation (Australia)

1. Introduction 2. Creation of “entry-exit” in Europe 3. Limits of EU “entry-exit” 4. Improvement proposals

3. Explicit (EU) versus Implicit (Australia) 3.1 Introduction

• Given a TSO and Guidelines for network services A/ We may separate the market for commodity (gas) and the

market for network services: EXPLICIT auction of network services

B) The rules definition based on the final gas prices ( bundled pricing and products): implicit auction

3.2 Creation “entry/exit” zones in Europe adds commodity liquidity inside each network zone

A B

Simple Point-to-point

FLAT TRANSMISSION SERVICE

time

A B Point-to-point with

time flexibility

T=max

T=1

‘’FLEXIBLE’’ TRANSMISSION SERVICES

A B1

Simple Entry-Exit (without time flexibility)

T=1

B2 B3

Bn B4

time

A B1

Entry-Exit with time flexibility

T=max

T=1

B2 B3

Bn B4

EU ‘’Very FLEXIBLE’’ TRANSMISSION SERVICES

Exit

Max capacity 100MW

Max capacity 100MW

Injection physical capacity up to 200

MW

TSOs do not know the gas

path in advance

TSO can sell 200 MW entry capacity if ½ goes

to Bologna and ½ to Torino

3.3 Limits of “entry-exit”: (1) Lower Capacity

Injection commercial capacity up to 100

MW

3.3 Limits (2) Tool kit in ACER Guidelines • Overselling entry/exit capacity

• The amount is calculated through flow path forecasting (TSOs need to adjust forecasted and real paths)

• Selling Interruptible capacity • TSOs keep the control of the capacity offer (also calculated by path

forecasting) and the control of whether to interrupt the service

• Short-Term Implicit Auction • Allocate available capacity according to commodity prices • As re-nominations are allowed within the day – the risk regarding

capacity calculation is decided by TSOs

21

“Daily” balancing scheme

3.3 Limits(3)... What to do with time flexibility?

The line-pack dilemma

Daily Balancing Free flexibility within-day

•The line-pack is allocated free •Players may use the balancing to adjust demand and supply – it has an economic value for flex shippers

Hourly Balancing No flexibility within-day

•The line-pack cannot be offered •The players cannot use the balancing to adjust demand and supply

Unfair competition between costless storage and other flexibility services

Line-pack does not exist

Cross-subsidies for flexible shippers

3.3 Limits (4)

EU unwanted?

• Too many contracts → Do less → Too few contracts? • Pipelines are monopolists → Regulated operator (TSOs) →

TSOs are intervening in the market? • Small players have problems to deal with time variability →

Centralize management of time variability (level playing field) → Small players are paying for large players’ time variability (far from a level playing field)?

3.4 Improvement proposals (1): Separating balancing tasks?

Allocation of: •Transport

Ensure system security

Market decisions

TSO decisions

Auction design

Balancing mechanism

Two different kinds of imbalances?

3.4 Improvement proposals (2): Criteria for adjustment mechanism design? • Need for the allocation of network capacity according to short-term market

preferences

• But ensuring the security of the real-time network operation

Objective Tool

Day-ahead Imbalances

• Allow efficient network allocation (both spatial and time) – for the short term available capacity

• Auction Procedure - allocate available capacity (transport and line-pack) and gas trade simultaneously

Real Time Imbalances • Guarantee system security • TSO actions

3.4 Improvement proposals (3): Auctioning Network Flexibility?

Allocation of: •Transport •Line-pack

Ensure system security

Market decisions

TSO decisions

Flexibility Auction design

Balancing mechanism

Two different kinds of imbalances?

4. How “entry/exit zones” design the cross-border market?

Crossing entry-exit zones ? 1. Introduction 2. Capacity allocation between entry/exit zones 3. Tariffs between entry/exit zones 4. Investment between entry/exit zones

4.1 Introduction

FLEXIBLE TRANSM. SERVICES crossing 2 ZONES

• Under entry-exit, network constraints are pushed at the border in the definition of cross-zone available capacity

• Contractual congestion appears between zones, as within the zone the shipper has the right to use the whole system

• In any direction • Within the balancing limits

4.2 Capacity allocation between “Ent/Exi” zones

Remedy Proposals Remedy Drawbacks

Market Merger Higher socialization costs

Market Coupling Separation of the LT capacity booking contract from the actual right to use the network

• Entry/Exit tariffs designed only inside each zone ― By definition costs do not reflect distance => longer distances

imply higher distortions • Pancaking when one adds several zonal tariffs to go across

― Investment decisions are assessed through existing zonal tariffs

• Entry/Exit tariffs redesigned for crossing zones? ― Inter-TSO compensation

• Coordination of payments among TSOs already nightmare in electricity

4.3 Tariffs between entry/exit zones

4.4 Investments between entry/exit zones (1)

4.4 Investment in between (2) What to build to connect players?

Consumer

Future Consumer

Producer

Producer

Consumer

Future Consumer

Small pipeline today

Small pipeline tomorrow

Large pipeline today

Who decides on the future network needs?

4.4 Investment in between (3) Investment in “contract” and “common” carriages

Consumer

Future Consumer

Producer

Producer

Consumer

Future Consumer

Small pipeline today

Small pipeline tomorrow

Large pipeline today

Who decides on the future network needs?

Who pays for the mistakes?

Regulation: socialization (everyone)

Contracts: parties involved (depends

on negotiation)

• Market mechanism: Open Season ― Shippers are not able to reveal preferences

a) Bundled services ― no information about players preferences: where the gas flows

and how much line-pack storage

b) Tariffs do not reflect cost allocation c) Measures to manage contractual congestion between zones –

decreasing the shippers’ rights

• Centralized mechanism: EU Ten Years Development Plan ― Should not be based on the abstraction implied by

entry/exit zones > Which algorithm? What data?

4.4 Investment in between (4)

5. Conclusion: free (“Markets”) for gas? • Definition of Ent/Exi trading zones is a regulatory

mechanism to push liquidity ― Increasing possibilities of zonal trade ― Forgetting actual network and gas flows

• As consequence: trade constraints displaced to the borders • However crossing zones is core of EU internal gas market

― How to redesign regulatory mechanisms to deal with the 3 types of cross border “barriers” or “imperfections”?

Capacity allocation Tariffs Investment decision

MARKET… My pretty market but… what market?

THANK YOU VERY MUCH!