Crossing Borders in European Gas Networks
10 Oct, 2009 04:36 pm
Demand for gas is on the rise in Europe, yet its indigenous production is in decline. The need for imports from remote sources will grow. At the same time, a pan-European market for natural gas is expected to develop, leading to new movements of gas in addition to the traditional direct flows from production facilities to consumers.
Liberalisation of the gas market has created its own dynamics and requirements for infrastructure. Also, the issue of security of supply has moved up on the policy agenda, stimulating diversification and new infrastructure. The accommodation of these developments requires that a significant expansion of the current EU 'interstate' natural gas transmission network should be made inthe coming decade.
Investments in transmission capacity, however, are slow to materialise and lack support from - and coordination between - regulators and transmission system operators (TSOs). In its 2008 Gas Market Outlook, the IEA concluded that "in marked contrast to North American pipeline investment, investments in internal connections and new supply projects in Europe continue to lag". The result is that it is hardly possible these days to close contracts for the following year's cross-border capacity anywhere in Europe.
There are many arguments in support of ensuring adequate capacity: insufficient transmission infrastructure in the EU hinders potential suppliers in competing for market share. It also frustrates investments in gas production and upstream transmission outside the EU, as well as in gas storages and LNG terminals within the EU. This, in turn, hampers the development of an integrated EU gas market and could negatively affect the ultimate goal of liberalisation, which has been to create an EU gas market with free trade and competition throughout the EU, to the benefit of the EU's citizens. Furthermore, security of supply could be jeopardised if such investments continue to be blocked or delayed.
Adequacy of transmission capacity can be addressed from many different perspectives. The supplier, the trader, the student of Security of Supply and the proponent of an integrated European gas market each have their own views of transmission adequacy and system bottlenecks. Many cases for system expansion are made, to be funded either with national or community means. Often their economic rationale is based on contestable claims of wider benefits for the community.
In a recent study we addressed the main impediments to the development of the EU gas transmission network, notably its cross-border transit dimensions, within and around the EU. It also offers four recommendations for regulatory and coordination steps toward overcoming these problems:
1) Shippers and TSOs that are directly involved in the construction and use of the new capacity via Open Seasons should bear the risks and rewards for new cross-border investments in transmission infrastructures. Tariffs for new cross-border pipelines should be sufficient to make investments in new transit capacity economically attractive and should take into account the duration of the capacity booked. Tariff adjustments should be applied at the time of new investments. They could be based on LRIC, i.e. reflecting actual CAPEX (including economies of scale), and translating these costs into "perpetual" (i.e. fixed, possibly indexed) tariffs.
2) The regulatory framework should endorse long-term, standardised transmission capacity contracts with fixed (indexed) tariffs, as a sound basis for investments in transmission capacity. These often underpin long-term commodity contracts, which should be considered as essential instruments in enhancing long-term supply security for the EU. To allow the necessary flexibilities for market parties throughout the value chain non-standardised, customised transmission contracts should be offered by TSOs as well, under appropriate regulatory conditions in line with competition law.
3) Tariff differentiation could be an effective instrument to improve the economics of specific transmission investments. There is no question that identical users of a network should be treated the same under comparable circumstances. However, there is less necessity to apply the same tariffs to new and old contracts, to short-term and long-term contracts, and/or to local and cross-border (transit) customers. Applying the non-discrimination principle in entry/exit tariff methodologies in a way that is in the interests of the wider community of EU consumers would allow distinctions to be made in exit tariffs between international and regional users, facilitating effective cross-border flows in the EU gas market and opening up more options for competition in TSO transit.
4) As the new body for the cooperation between NRAs, ACER should receive a straightforward mission to promote the development of a strong and reliable energy infrastructure in the EU energy market. In amending its mandate in that sense, ACER should also be given the necessary power to intervene in cross-border issues in the wider interest of EU consumers.
We believe that the content of these recommendations could most likely be applied in the context of the new 2009 Directive and it's supporting Regulations. The recommendations would imply a 'conversion' of the current regulatory system into a set of rules and processes focusing on the development of a strong and reliable energy infrastructure. This would lead to an environment in which investments in cross-border transmission infrastructure - sought and underwritten by shippers - are facilitated. None of these recommendations are completely without problems, but these should not be insurmountable. Crossing national borders is essential in securing an adequate supply of natural gas to Europe. It is time to construct the missing links.
Jacques de Jong and Aad Correljé, Clingendael International Energy Programme
Originally published on EU Energy Policy Blog