Zone Merger – learning from experience and developing an evidential based approach
Target Model Workshop 3, London 11 April 2011
Nigel Sisman Senior Adviser
Zone Merger opportunities and challenges
2
Challenges
Risks of internal congestions- changes in flows may expose new constraints- Which options to manage risk
Establishment of “balancing market operator”- New operational and settlement functions
Enhanced cross-border TSO cooperation - Increased contractual, tariff and operational complexity
Opportunities
Enhanced trading opportunities- Focussed liquidity- Robust price indexes
Simpler transportation arrangements- Less entry/exit zone bookings
Easier system user balancing- Access to functioning balancing
markets
… free lunches do not exist; so how do we assess the tradeoffs?
Presentation structure
• Learning from merger experience • Developing an evidential approach to assess challenges• Understanding liquidity and trading depth• Conclusions
3
Learning from merger experience
4
Recent Merger Experience
Gas experience
• France - a single TSO experience• Integration of northern hubs to create PEG Nord
• Germany – a multi-TSO experience• A stepwise integration towards two zones
… and lessons learnt from electricity?
5
French experience
PEG North/West/East merger2 Full Entry/Exit PEG zones
For reasonable scenarios 360 M€ investment
6
0
1 000
2 000
3 000
4 000
5 000
6 000
7 000
8 000
1 000
6 000
11 000
16 000
21 000
26 000
01/0
1/06
01/0
3/06
01/0
5/06
01/0
7/06
01/0
9/06
01/1
1/06
01/0
1/07
01/0
3/07
01/0
5/07
01/0
7/07
01/0
9/07
01/1
1/07
01/0
1/08
01/0
3/08
01/0
5/08
01/0
7/08
01/0
9/08
01/1
1/08
01/0
1/09
01/0
3/09
01/0
5/09
01/0
7/09
01/0
9/09
01/1
1/09
01/0
1/10
01/0
3/10
Num
ber o
f tra
des
Trad
ed v
olum
es (G
Wh)
Traded volume South zone
Traded volume North zone
Number of trades South zone
Number of trades North zone
Source GRTgaz
PEG Nord has the critical size for liquidity to develop• 6 IP, 1 LNG terminal, 9 storages, 330 Twh of demand
which enabled :The creation of a gas exchange (Nov 2008)The development of market based balancing An increased attractivity for CCGT projects
… zone merger facilitated by investment
German experience• Progressive reductions in number of zones
- By 1.4.2011 3 zones- Legal obligation by 1.8.2013 2 zones
• Balancing Operators introduced• “Statistical firm” capacity model
- Successful model if no sudden major changesof market behaviour occur
Otherwise capacity reduction• Prerequisites
- Intense cooperation and trust between involved TSOs needed- Specific characteristics of the individual grids need to be considered- Involvement of NRA when defining the model
7
… increasing complexity necessitates cost benefit analysis for next step
… zone merger facilitated by reflecting congestion risks in system user’scapacity entitlements
Electricity experience
Scandanavia experience • single Swedish price zone but significant internal constraints• “Constraints exported to national borders”• accusation of discrimination domestic/international consumers• Swedish pricing zones to be established
8
… the underlying physical realities of transmission are important … internal constraints must be “small” to ensure efficient merger outcomes
Developing an evidential approach to assess challenges
9
The Challenge of Zone Merger
Internal bottlenecks are “transferred” to new zone borders
• New risk management approaches needed
Zone mergers have implications
• benefits from enhanced trading environment
• redistributive effects between system users • tariff implications • changes in values of flexibility offered to
market/TSOs.
10
Enlarged Zones
Less certainty and changed flows
Increased risk of internal
congestion
Managing internal congestion risks in enlarged zones
• Investment• Flow commitments• Reduced firmness of capacity or reduction of capacities• Point-to-point capacity arrangements• Constrained on/off (local purchase/sale of gas behind/in front of constraint)• or combinations of any of the above
11
… the options may have different costs and different benefits in delivering enhanced liquidity
Possible methodology to assess potential for internal congestion costs arising from zone merger
12
Simulation model
Internal ConstraintsFreq/Size
Evaluation model
Flow scenarios
Network Model
Investment Options
Capacity availability
options
Flow commitment
options
Balancing - constrained
on/off options
Preferred option or
combination costs
International merger involves greater challenges
• Legal framework• Tax issues• Governance
• Location of virtual trading points• Who manages the system
• Regulatory and Member State sovereignty
13
… international zone merger in gas has not yet been delivered
Understanding liquidity and trading depth
14
Benefits of larger zones – liquidity and trading depth
15
• How deep and liquid does the market need to be?• What criteria define a “Functioning” market?
… what value do we attach to:• traded volumes?• churn rates?• competition measures (HHIs)?
Assessing market efficiency - daily NBP Gas Trades
0
5
10
15
20
25
30
Twh
NBP Trades March 96 to January 07
Total Gas Traded Total Daily PhysicalNational Grid data
Improvements in balancing regime and market experience
Simple commoditised, zero tolerance daily balancing
NBP Trade Sells by shippers - same day in January
Shipper
Ener
gy tr
aded
… over 100 players each side of the market…. HHI around 370 on both side of the market
Recent NBP trading & liquidity
National Grid data
NBP Trade Buys by shipper - single day January 2011
Shipper
Ener
gy tr
aded
11/8/2008
11/29/2008
12/20/2008
1/10/2
009
1/31/2
009
2/21/2
009
3/14/2
009
4/4/2009
4/25/2
009
5/16/2
009
6/6/2009
6/27/2009
7/18/2
009
8/8/2009
8/29/2
009
9/19/2
009
10/10/2009
10/31/2009
11/21/2009
12/12/2009
1/2/2010
1/23/2
010
2/13/2
010
3/6/2010
3/27/2
010
4/17/2010
5/8/2010
5/29/2010
6/19/2
010
7/10/2
010
7/31/2
010
8/21/2
010
9/11/2
010
10/2/2010
10/23/2010
11/13/2010
12/4/2010
12/25/2010
1/15/2
011
2/5/2011
2/26/2011
3/19/2
0110
10
20
30
40
50
60
NBP Daily Trade - Nov 2008 - Mar 2011Tw
h
… but how do we value the consumer benefit of this level of liquidity?
Conclusions
Mergers afford both opportunities and challenges
First steps may be straightforward but challenges escalate rapidly
Trading/liquidity benefits delivered via a range of alternative approaches• but physical constraints can’t be too great
Assessing benefits and costs• How do we assess benefits?• How to assess best option(s) for risk mitigation?
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… no free lunches; evidential approach should support the case for zone merger