Gas transportation tariffs: comparing tariffs including and excluding free tolerance

Transcription

1 Gas transportation tariffs: comparing tariffs including and excluding free tolerance A review of selected West European System Operators at 1 February 2008 Report to Gas Transport Services Publication date: first half of June 2010 Arthur D. Little Limited The Counting House 53 Tooley Street London SE1 2QN United Kingdom Telephone +44 (0) Fax +44 (0) Reference ADLUK 21980

2 Table of Contents 1 Executive summary Introduction Definition of balancing Definition of free tolerance Methodology of calculation Description of country information on free tolerance Netherlands GTS...12 Belgium Fluxys...13 UK National Grid...14 Germany GUD (BEB) & E.ON Gastransport (EGT)...15 France GRTgaz...17 Overview of balancing systems and tolerances Valuing the free tolerance Facilities used as physical substitutes to tolerance Röhrenspeicher Salt cavity...21 Valuation through commercial tariffs Results: transportation tariffs cleansed for free tolerance Calculation method...24 Presentation of results...28 Conclusions...36 GTS/21980/017.rep 1

3 List of Tables Table 1: Alternative sources of flexibility to the free tolerance regimes of the selected TSOs Table 2: GTS tolerance levels Table 3: Comparison of balancing and tolerances Table 4: Calculation of the six capacity levels and the applicable hourly and cumulative free tolerance Table 5: Cycle duration in hours and physical substitute for each TSO for the six Table 6: capacity cases Example calculations illustrating the impact of the Low and High storage valuation scenarios, assuming 12,500 m 3 /h transportation capacity on the GUD system and a transportation tariff of /m 3 /h/y Table 7: Summary results of traffic light diagrams, normal temperature day Table 8: Summary results of traffic light diagrams, normal temperature day including blank Table 9: Summary results of traffic light diagrams, cold temperature day Table 10: Summary results of traffic light diagrams, normal temperature day including blank GTS/21980/017.rep 2

4 List of Figures Figure 1: Illustration of the calculation of storage facility characteristics as an alternative to free balancing tolerance Figure 2: Tariff inputs based on the GDF salt cavity storage commercial tariff Figure 3: Transportation tariffs for the 45 cases for selected TSOs, /m 3 /h/y Figure 4: Traffic light diagrams, normal temperature day Figure 5: Traffic light diagrams, cold temperature day GTS/21980/017.rep 3

5 1 Executive summary This study compares the gas transportation tariffs of Gas Transport Services (GTS), Fluxys, Gasunie Deutschland (GUD, formerly BEB), E.ON Gastransport (EGT), National Grid (NG) and GRTgaz. The methodology used is not the same as in Arthur D. Little s annual comparison of transportation tariffs ( annual report ), which has been commissioned and published by GTS since The last report using this methodology was published in July 2008, using tariff data from 1 February However, in order to go beyond the annual reports, to a more advanced analysis, this study compares gas transportation tariffs after the removal of the value of the balancing tolerance which is included in the standard transportation charge. These results, stripped of the tolerance which is bundled into the standard transportation at no additional cost, are referred to as cleansed tariffs. So, the aim of this study has not been the comparison of the balancing regimes themselves, but the resulting transportation tariffs after the impact of the provision of free tolerance has been taken into account. For each system operator mentioned above, we have reviewed the tolerance regime to determine the amount of the free tolerance. The service provided by the free tolerance was then compared with a physical alternative (or substitute such as a salt cavity) which can provide the same amount of free tolerance, expressed in terms of the same injection rate, withdrawal rate and working volume. The charges associated with these physical substitutes for balancing tolerance were used to value the flexibility received as an integral part of the transportation tariff. This valuation is thus principally based on the commercial tariffs currently available for salt cavities. In order to test the robustness of the analysis, a wide range of values around these commercial tariffs has been taken, and a sensitivity analysis has been conducted. As there is only a desire to cleanse the transportation tariffs of the free tolerance, other charges which may be levied by TSOs have not been evaluated, such as the costs associated with exceeding the free tolerance level. Such costs are not relevant to this analysis, which is aimed at making a fair comparison of transportation tariffs in terms of what the shipper actually gets in return for paying the tariff. The results of the analysis show that even when a range of valuations for the costs of the alternative physical form of free balancing tolerance or flexibility is considered, the cleansed transportation tariff of GTS is mostly lower than, often similar to and very rarely higher than the cleansed tariffs of the other TSOs in this comparison. This outcome is also true in the case of an extremely cold day, when GTS is the only TSO in the sample to reduce the free tolerance provided. Therefore, the conclusion is that using an advanced and realistic approach, which removes the effect of the free balancing GTS/21980/017.rep 4

6 tolerance, the GTS transportation tariff is nearly always the lowest in the cases which were studied. This was also the conclusion of ADL s annual reports. GTS/21980/017.rep 5

7 2 Introduction This study is designed to complement the annual tariff comparison carried out by Arthur D. Little on behalf of Gas Transport Services (GTS), which is published in the report West European Gas Transmission Tariff Comparisons on the GTS website. GTS is aware that there are elements of, or in addition to, the transportation tariff that have not been considered in the annual tariff comparison until now. A key element of this is the balancing tolerance provided by system operators to shippers as part of the transportation tariff: the transportation service includes the physical transportation of gas plus a distinct bandwidth of allowed imbalance. Therefore, GTS is interested to understand the value of the free tolerance, which is essentially free flexibility, provided as part of the transportation fee. The transportation tariffs and balancing regimes analysed in this report are those in force at 1 February GTS/21980/017.rep 6

8 3 Definition of balancing The term balancing with respect to gas transportation is used to express the equalisation of the national high and medium pressure gas networks in a country, which is necessary to ensure the national gas transportation grid operates in a stable and reliable manner. Equalising (or balancing) means the amount of entry gas and exit gas should be more or less in balance (i.e. the inputs to the network are equal to the outputs from the network). The national gas grid operator is responsible for the balance of the gas transportation system. To be able to perform this task, gas network operators have developed sets of rules with which shippers must comply. Often such a set of rules is referred to as the balancing regime. The aim of a balancing regime is for each individual shipper to ensure that the entry gas and the exit gas within his portfolio are balanced. For an individual shipper to be in balance the difference between the entry gas and the exit gas has to stay within specified limits, referred to as the tolerance band. Depending on the system and the operator, the tolerance band varies in size and may even be set at zero. Gas networks themselves will also vary between one another, as the length, pressure, number of entry and exit points can differ significantly, not to mention the demand (or exit) characteristics. At the end of a defined period, any differences between entry gas and exit gas volumes which exceed the specific balancing ruling will be surcharged by the network operator to the relevant shippers. Often surcharge payments are charged for defined levels of imbalance. In so far as a shipper cannot meet the set of balancing rules and wants to avoid the surcharges and/or surcharges, he will need extra flexibility, either to be provided by the use of a flexible gas source (storage) and/or interruptible customers, or buying, when offered, this flexibility from the network operator. In some markets, shippers may be able to trade within day, either bilaterally or via an exchange, which also allows them some flexibility. It is understood that in some countries, if a shipper does not need the free rights to tolerance limits given by the national gas network operator, it can sell these rights in advance to a shipper who does require them. This is possible in the Netherlands and Belgium, and in Germany it is possible to transfer tolerance between balancing groups in advance by connecting the two groups for a period of time. Previously, when the network operator and merchant activities were within the same (integrated) company, balancing was much easier, as the two departments exchanged information with each other and there was only one shipper, that is, the merchant department. Therefore maintaining system balance was simpler, as all the entry and exit gas was in the hands of a single player. Since unbundling has taken place, however, GTS/21980/017.rep 7

9 balancing has come more into focus as retaining system stability became more complex with multiple shippers. Various kinds of balancing systems and rulings had to be set up by the network operators and approved by regulators, who clearly have an interest in the smooth and stable operation of the gas transportation system and market. It can be observed that over time balancing regimes develop as markets mature and shippers gain sophistication and experience. As time passes on balancing shippers become more experienced and aware of how to manage their portfolios. The focus shifts away from the individual shipper level slightly and more towards the balance of the system. For example, shippers may be allowed to balance after the event by trading imbalances amongst themselves, avoiding the surcharges. System rules still encourage them to flow in a rateable manner and manage their portfolios to balance within the tolerance bands, thus maintaining system balance. As market information, sophistication and liquidity improve, it becomes possible for the system operator to focus far more on system balance than on individual shippers flows. The market rules now incentivise shippers to take actions between themselves to maintain balance, as many possibilities exist for them to do this, and free tolerance bands are removed. When the system becomes out of balance, the system operator takes action and smears the cost across all shippers according to the volume shipped. Capacity overruns, where a shipper uses more capacity in the system than he has booked, and nomination errors, where a shipper s actual flows are not as he declared them in advance, are not strictly part of balancing, although system operators may categorise them within the same area of their use of system rules. GTS/21980/017.rep 8

10 4 Definition of free tolerance In this report, the value gained by shippers from the balancing tolerance they receive for free as part of the transportation fee paid is considered. This tolerance is essentially free flexibility and therefore has value to the shipper. In some markets shippers can sell their surplus free tolerance to other shippers and realise value from it. Most shippers, however, simply use the tolerance allocated to them as part of transportation. The analysis does not review any supplements or surcharges for imbalances outside the free tolerance bands nor subscriptions to additional tolerance as such imbalances are not free of charge or part of the standard balancing service, and therefore do not constitute part of the standard transportation service. Only the available tolerance for which no fee must be paid is considered. This has been evaluated from the best economic perspective, looking at what is available and not whether the shipper actually can or would use it. As already mentioned, the shipper can in some cases trade unused tolerance. The free tolerance exists, regardless of whether or not it is used, and regardless of who uses it. Other studies, such as CEER s benchmarking report on transportation tariffs, have looked at hourly shipper profiles and considered the charges payable on various TSOs systems for imbalances of different sizes. This study does not look at imbalance supplements or surcharges, and therefore does not feature hourly profiles of gas flow, because only what the shipper receives as part of his transportation fee is considered. Indeed, the goal of this study is an improved understanding of the comparison of transportation fees; the tolerance is of interest only as an element of the standard fee charged. GTS/21980/017.rep 9

11 5 Methodology of calculation The tolerance regimes in the Netherlands, Belgium, France, the UK and Germany (for Gasunie Deutschland (or GUD, which was known until 1 st July 2008 as BEB) and E.ON Gastransport) have been reviewed. The conditions of the tolerance regimes to the capacity requirements of the customer cases used in the annual transportation tariff study 1 have been applied, for consistency of approach across these two pieces of analysis. A shipper s free balancing tolerances can be substituted for some form of flexibility, the cost of which can be used to provide a value for the free tolerance. The method is to take physical substitutes, which the shipper could use as an alternative form of flexibility, to value the free tolerance. Röhrenspeicher and salt cavity storage are regarded as suitable alternative forms of short-term flexibility and, for each customer case, the costs to use these facilities to gain the equivalent flexibility provided by the free tolerance have been evaluated. By subtracting this figure from the standard transportation fee, a cleansed transportation charge can be produced for each customer case and a comparison of the TSOs fees without the value of the free tolerance can be conducted, thus improving the comparison of the pure transportation tariffs. The balancing tolerance regimes for each TSO have been applied to the required capacities, and injection rates, withdrawal rates and working gas volume figures for each case have been calculated. In order to do this, the tolerance regimes have been modelled, considering the cumulative tolerance limit, both positive and negative, to be the level at which the implied storage facility is full (working gas volume). The hourly tolerance limit produces the m 3 /h injection and withdrawal capacity. For regimes where a daily tolerance also exists, the models showed that the daily limit did not come into play in the theoretical cycling of the storage facility, as the hourly and cumulative limits ensured the shipper was within the daily tolerance at the end of the gas day. Figure 1 illustrates the method, using the GUD (BEB) tolerance limits as an example. The case is for a transportation capacity requirement of 1 million m 3 /h/y. Descriptions of the balancing systems of GTS, Fluxys, GUD (BEB), EGT and GRTgaz are shown in Section 6 of this report. 1 Arthur D. Little has for several years compiled an annual review of transportation tariffs in Western Europe at the request of GTS. The 2008 study can be downloaded from the GTS website: GTS/21980/017.rep 10

12 Figure 1: Illustration of the calculation of storage facility characteristics as an alternative to free balancing tolerance 1.5 Hourly tolerance forms the capacity for the injection and withdrawal rate per hour, in this case 0.1 million m 3 /h 1.0 Zero on the y axis is equal to a position of no imbalance m The working gas volume is the full range of the cumulative tolerance, in this case 2 million m Cumulative tolerance limit -1.5 Hour Source: GUD (BEB), ADL analysis The type of flexibility which would be a relevant substitute for the free tolerance will be different depending on the requirement stemming from the particular balancing regime. For example, in a regime where the free tolerance is filled in a few hours, a Röhrenspeicher facility may be appropriate as the substitute, whereas for a regime where the maximum free tolerance is not reached for a number of days, it may be substituted for a salt cavity storage facility. The types of facility chosen for each TSO are shown in Table 1 below. From the relevant inputs, a cost figure has been calculated and translated into a value per unit of capacity which can be subtracted from the transportation fee to show tariffs after free tolerance has been accounted for. The calculations and assumptions behind them are detailed in Sections 7 and 8. Table 1: Alternative sources of flexibility to the free tolerance regimes of the selected TSOs GTS Fluxys GUD E.ON GRTgaz Facility type Röhrenspeicher Röhrenspeicher Röhrenspeicher Salt cavity Salt cavity GTS/21980/017.rep 11

13 6 Description of country information on free tolerance Netherlands GTS Three tolerances apply to the GTS balancing system: hourly, cumulative and daily (referred to by GTS as the daily margin; the cumulative imbalance at the end of the gas day, which is then reset to zero for the start of the following gas day). Tolerances are defined by the average of the shippers monthly booked entry and exit capacities (i.e. summing the shippers portfolio of entry and exit capacities then dividing by two). Hourly and cumulative tolerance levels are also dependent on the size of the shippers portfolios. Table 2: GTS tolerance levels 2008 Tolerance bracket (m 3 n;35.17)/h Percentage hourly tolerance Percentage cumulative tolerance 0-250,000 m % 90.0% 250,000-1,000,000 m % 52.0% > 1,000,000 m 3 5.7% 22.8% Daily margin (daily tolerance): 36% Furthermore, both hourly tolerance and cumulative tolerance are temperaturedependent. At temperatures below 0 Celsius they will decrease in a linear line to 2% for hourly tolerance and to 4% for cumulative tolerance at 17 Celsius (effective daily period temperature in De Bilt (NL) for a gas day). The cumulative tolerance is equivalent to four times the hourly tolerance at normal temperatures and becomes twice the hourly tolerance at -17 Celsius. GTS operates a time-shift for the calculation of balancing positions: out-flows are compared with in-flows two hours later. This detail is not important for the analysis. GTS/21980/017.rep 12

14 Belgium Fluxys The Fluxys system has 4 Balancing Zones, or Balancing Points (BAPs). 3 of these zones are for H-gas, and 1 is for L-gas. Each supply point is associated with a Balancing Zone. If the balancing point of the entry zone is the same as the balancing point of the exit zone, then the shipper nominates at both the entry and supply points. If the balancing point of the entry zone is not the same as the balancing point of the exit zone, then the shipper nominates at the entry and supply points, and the transfer point between the zones. Fluxys applies a daily balancing system with hourly tolerances per balancing zone. The imbalances are put on an imbalance account. For each grid user, the imbalances are aggregated and cumulated per balancing zone and per hour. The firm supply capacity to supply a non-slp customer (all our profiles are non-slp customers, meaning they have tele-transmission installed for metering equipment) provides the following basic tolerance levels: Basic Rate Flexibility (RF): capacity = 10% of subscribed supply capacity Basic Hourly Imbalance Tolerance (HIT) + 50% of subscribed supply capacity up to 20,000 m3/h, and 16.67% of subscribed supply capacity above 20,000 m3/h Basic Cumulative Imbalance Tolerance (CIT) + 100% of subscribed supply capacity Basic Daily Imbalance Tolerance (DIT) % of the subscribed supply capacity The Basic Rate Flexibility has been excluded from the calculations as it can be used in only one hour of the day. GTS/21980/017.rep 13

15 UK National Grid National Grid does not explicitly give hourly tolerance levels. The TSO takes action to balance the system during the day, but not on a shipper by shipper basis. Balancing for shippers is on a daily basis with no tolerance given. Therefore, so long as a shipper is in balance at the end of the gas day, it does not have to be in balance every hour. So hourly tolerance on the National Grid system exists but is not measured. Theoretically one could say it is at 100% of capacity, although shippers are encouraged to behave in a responsible manner and nominate rateable flows through various operational incentives and constraints which may not allow this in practice. Also, in practice it is understood that shippers are physically able to act to the extremes of the tolerance within day; for example, the in-flows cannot be modulated widely (because of the nomination/ renomination provisions in typical gas purchase agreements) and may well be flat through the day. The main difference between the National Grid balancing regime and the others included in this study is that the focus is placed on balancing the entire system rather than the individual shipper. National Grid is not permitted to make or lose money from operating the balancing system, so any extra actions taken by them result in the receipts and payments being netted off (including scheduling and nominations payments), with shippers then credited or debited according to their gas shipment quantities. The shippers are incentivised to balance their portfolios each day, and they often do this between themselves within day or after the event. Any outstanding daily imbalances are cashed out at the system marginal sell or buy price. For shippers under other balancing regimes, the possibilities to take intraday balancing actions are limited, which could point to a requirement for free tolerance. The above reasons suggest that a comparison of the National Grid balancing system with others in Continental Europe would not be on a like for like basis. GTS/21980/017.rep 14

16 Germany GUD (BEB) & E.ON Gastransport (EGT) Tolerances are hourly and cumulative. The applicable hourly capacity is the basis for their calculation. This is based on exit capacities in a balancing group: if entry capacities are greater than the exit capacities, the applicable hourly capacity for a balancing group is the sum of the exit capacities and maximum offtakes in the balancing group. If not, the sum of the exit capacities and maximum offtakes in the balancing group are multiplied by the BBA quotient. The BBA (Basisbilanzausgleich) quotient is the basic balancing services quotient, set once a year for each market area by the TSO. The BGW/VKU Guidelines define this as: A. If the entry capacities are greater than or equal to the exit capacities and maximum offtakes of a market area, the BBA quotient = 1 B. If entry capacities are less than the exit capacities and maximum offtakes, then: BBA quotient = Relevant entry capacity Relevant exit capacity/maximum offtakes GUD (BEB) has a BBA quotient of 1 EGT has a BBA quotient of 0.6 for H-Gas and 0.65 for L-Gas For each hour there is a tolerance level of plus or minus a percentage of the applicable hourly capacity. The hourly imbalances are continually accumulated into the balancing group s gas account to determine cumulative imbalances. The tolerance level for cumulative imbalances is a multiple of the applicable hourly capacity. GUD (BEB) has an hourly tolerance of + 10% and a cumulative tolerance multiple of 1 EGT has an hourly tolerance of + 15% and a cumulative tolerance multiple of 3.6 (from 1 st October 2008 the EGT tolerance levels will be the same as those of GUD (BEB)) The cumulative imbalance includes the hourly tolerance level and is calculated after the hourly chargeable imbalance has been removed (assumed to be settled). The cumulative imbalance has an effective cap at the level of the applicable hourly capacity plus one hourly tolerance: each hour the cumulative imbalance exceeds the cumulative tolerance level (once the applicable hourly capacity), the imbalance of that hour is assumed settled and therefore the cumulative imbalance account returns to the cumulative tolerance level (once the applicable hourly capacity). If there is a cumulative imbalance at the end of the day which is not assumed to be settled then the clock is not reset to zero. GTS/21980/017.rep 15

17 Instead, the imbalance continues until either the shipper resolves it or it reaches the cumulative limit and is assumed settled, i.e. the clock is reset at that time. GTS/21980/017.rep 16

18 France GRTgaz The French network consists of 4 main balancing zones, the North (North B, North H), East, West and South. Each zone covers a large geographical area and shippers are required to balance the gas that they supply and take off on a daily basis, for each balancing zone. In the North zone, balancing is conducted for both gas qualities. Imbalances are determined by the net difference in total entry and exit quantities transmitted by each shipper on a daily basis. These imbalances are dealt with (cashed out or penalised) in a tiered system, depending on how significant the daily imbalance is. This system is governed by the limits known as Authorised Maximum Daily Imbalance, Cumulative Imbalance Mid-range and the Maximum Cumulative Imbalance. These limits are in turn defined by balancing tolerances that are applied across the balancing zones. The definitions for each of these are defined in the balancing rules on GRTgaz s website. Consultation with GRTgaz has confirmed the calculation of these is detailed in the Natural Gas Transmission Contract as published on 1 st January Balancing tolerances The free balancing tolerance available within the network is referred to as standard; additional optional tolerance may also be subscribed but does not feature in our calculations: standard tolerance (TSE) tolerance available to all shippers as part of the standard transmission service. This is equal to + 20% of total delivery capacity for capacity up to 1 GWh/d. For high rates, + 5% is applied to the proportion of capacity greater than 1 GWh/d. For assessment of free tolerance available to shippers (i.e. included in standard transmission contract), only the standard tolerance is applicable. Calculation of limits The Authorised Maximum Daily Imbalance is based on the standard tolerance allowable (EBJPA) on a daily basis: EBJPA = TSE / As indicated in the Natural Gas Transmission Contract (1 January 2008), it is evident that cold temperature considerations are factored in to optional tolerance and not the standard tolerance, therefore these are not included in this assessment. GTS/21980/017.rep 17

19 The Cumulative Imbalance Mid-range (TCEBJ) is a limit set within the bounds of the Authorised Maximum Daily Imbalance. Daily imbalances up to this range are allowed (see Balancing System for further explanation). Since its inception in September 2007, the Cumulative Imbalance Mid-range has been set at 70% of the Authorised Maximum Daily Imbalance. This value was revised on 1 May 2008 to 55% for the summer months from 1 May 2008 to 31 October From the 1 November 2008, it will revert to 70% and is anticipated to stay at this value for the winter period Our calculations of tolerance use the 70% figure. In each balancing zone, the Authorised Maximum Cumulative Imbalance (EBCNA) is: EBCNA = + 5 x (TSE x TCEBJ) / Using these terms, the balancing system across each zone for standard transmission can be explained. Balancing system for each zone: 1. If daily imbalance is less than or equal to the Cumulative Imbalance Mid-range, then the daily imbalance is accumulated month-on-month in a cumulative account. This account is limited by the Authorised Maximum Cumulative Imbalance. When this limit is reached, the shipper must take action to reduce this cumulative imbalance. 2. Imbalance tranches between the cumulative mid range and the Maximum Daily Imbalance are bought/sold by GRTgaz at a daily balancing price (P1) 3. For imbalance tranches outside the Maximum Daily Imbalance, the shipper must buy these from/sell them to GRTgaz at a stated surcharge price (P2) GTS/21980/017.rep 18

20 Overview of balancing systems and tolerances The types of tolerances given by the TSOs are compared in Table 3 below. Table 3: Comparison of balancing and tolerances Tolerance based on? GTS Fluxys NG GUD/E.ON GRTgaz Entry + exit capacity / 2 Exit capacity N/A Exit capacity Exit capacity Temperature element? N/A % changes by size of shipper total capacity? N/A Hourly tolerance? Not explicitly Not explicitly Cumulative tolerance? Cumulative balance reset? Daily Shipper must take action Daily tolerance? N/A Daily balancing but no tolerance Never, but capped Over period >1 day Shipper must take action The table clearly shows that tolerance regimes vary widely between markets, as networks, market maturity, regulation, supply and demand factors vary also. GTS/21980/017.rep 19

21 7 Valuing the free tolerance Having established the level of free tolerance available for each of the TSOs, the method requires a value to be placed on it. This will enable the value to be subtracted from the published transportation tariffs and thereby determine the transportation fee without the inclusion of free tolerance. It has already been explained that the alternative physical storage choices used in this study are a Röhrenspeicher or a salt cavity, to fit with the implied storage requirements derived from the balancing tolerance limits. In this section, some further details about these facilities are provided and the method of calculation of value assigned to them is described. Facilities used as physical substitutes to tolerance Röhrenspeicher A Röhrenspeicher is a length of extra pipeline which is operated at a higher pressure than the pipelines to which it is connected. There are many possible configurations, with working pressure ranging from 100 bar to 180 bar and various combinations of bundles (injection capacity, withdrawal capacity and working volume). Furthermore, Röhrenspeicher are characterised by the lack of any geological constraints, in contrast to salt cavities, depleted fields and aquifers, and therefore they can be built almost anywhere. These factors make them a relatively simple way of storing (or buffering) gas. Röhrenspeicher are generally built by the national network operator. Capital expenditure consists of pipeline costs (which depend on the pipeline length and diameter), costs of land, a compressor for injecting the gas, and some other components, such as cushion gas and a relatively small heating system in comparison to that required by other storage facilities. The capex of pipeline costs and land costs will increase in a linear fashion as the cycle time increases. Fuel gas costs depend by definition on the working gas volume, the number of cycles, the costs of fuel gas per cubic metre and the efficiency of the compressor, which depends, amongst other things, on the pressure range used. The following provides an illustration of the operational capability of a Röhrenspeicher. Here it has been there are assumed 360 full (injection and withdrawal) cycles per year, with each cycle lasting 16 hours. The total content of a Röhrenspeicher can be calculated as follows: GTS/21980/017.rep 20

22 Area of the pipeline cross-section * length = volume of the pipe 1000 mm diameter pipeline with 1 km length = π r 2 * 1,000 = approx. 800 m 3 Maximum pressure = 100 bar Gas volume = 100 bar * 800 m 3 = 0.08 million m 3 When a minimum pressure of 55 bar is assumed, the cushion gas left amounts to million m 3, thus leaving million m 3 as the useful working gas volume Salt cavity The general principles of salt cavity gas storage are well known and therefore no detailed description seems necessary. The capex consists of investment costs for the salt cavity and its installations, a compressor and the cushion gas, with the cushion gas being a small proportion of the total capex (for a depleted field, for example, the cushion gas would be a more significant proportion of the capex). The investment costs of the salt cavity will increase in a linear fashion as the cycle duration increases. Fuel gas costs depend on similar factors as for the Röhrenspeicher above, such as the amount of working gas volume, the number of cycles, etc. Valuation through commercial tariffs Many storage operators offering Third Party Access to their facilities publish tariffs for usage. These tariffs will be based on the factors such as the asset lifetime, depreciation rate, rate of return, anticipated typical usage of the facility and so on. Access to storage is exempt from regulation in many countries and tariff and access structures are not standardised. For example, shippers may be offered bundles of storage incorporating ratios of injection capacity to withdrawal capacity to working gas volume only, which may mean they have to purchase more of a particular factor than their actual requirement. In some cases withdrawal and injection is purchased on a capacity based, in others on a volume basis (i.e. the shipper pays for every m 3 of gas he flows in and out of storage). Other factors may also be included in the commercial tariff, such as administration fees or transportation between the main high pressure network and the storage facility via a connecting pipeline. The results of our analysis of the balancing regimes suggest that in the EGT market area and in France the alternative flexibility would be a salt cavity (see Table 5). EGT commercial tariffs include a transportation element and are therefore not strictly related just to the storage itself, so we have reviewed the GDF tariff for access to salt cavity storage. An illustration is provided below assuming a full cycle duration of 480 hours (240 hours injection and 240 hours withdrawal). The GDF tariffs have been converted GTS/21980/017.rep 21

23 from /MWh to c/m 3 at MJ/m 3 to make the calculations consistent with the results of the annual transportation tariff study. Injection: c/m 3 * 240 hrs * 18 cycles * 1,000,000 m 3 /h = 13,083,240 Withdrawal: c/m 3 * 240 hrs * 18 cycles * 1,000,000 m 3 /h = 4,220,400 WGV: c/m 3 * 240,000,000 m 3 = 35,756,167 Total: 53,059,807 or /m 3 /h/y (of injection or withdrawal capacity) Research did not discover any commercial tariffs for Röhrenspeicher. Röhrenspeicher operate over short periods of time, performing a role similar to that of linepack within a system. It is understood that over a short cycle, of say two or three days, a Röhrenspeicher would be more economical to use than a salt cavity. However, there are no equivalent tariffs for use of the Röhrenspeicher and therefore it is not possible to perform precise calculations for the use of the Röhrenspeicher as the alternative source of flexibility. It is possible, though, to carry out calculations on the basis of the salt cavity tariff outlined above. This is considered to lead to a slight over-estimation of the value of the alternative form of flexibility during cycle lengths of up to two or three days, and thus the approach can be considered to be conservative. In addition to choosing suitable alternative sources of flexibility for each of the free tolerance regimes, it is considered useful to look at a range of tariff inputs for the calculations to demonstrate their robustness. Taking a range of tariffs provides a sensitivity test and allows for a degree of interpretation of the results. For example, if tariffs are taken to be cost reflective, and as it is known that the cost of materials for storage facilities, such as steel, fluctuates over time, it is relevant to consider the impact on the results of different cost levels and therefore different tariff levels. The range on the commercial salt cavity tariff (which is referred to as the Base scenario) is based on taking as an upper bound the commercial tariff plus 50% (High scenario) and as a lower bound the commercial tariff minus 50% (Low scenario). The following graph shows the tariffs used to value the physical alternatives to free tolerance. An illustrative Röhrenspeicher tariff is included, showing that at a point of around two or three days cycle time, the unit cost for a Röhrenspeicher exceeds that for a salt cavity. It is assumed that a suitable location is available and a salt cavity is built instead of using the free tolerance. GTS/21980/017.rep 22

24 Figure 2: Tariff inputs based on the GDF salt cavity storage commercial tariff /m3/h/y (injection and withdrawal capacity) Hours of 1 complete cycle (injection and withdrawal) Roehrenspeicher (estimate) - Low Roehrenspeicher (estimate) - Base Roehrenspeicher (estimate) - High GDF - Low GDF - Base GDF - High Source: GDF, ADL analysis It is assumed for the calculations in this study that the shipper is booking adequate storage to cover its free balancing tolerance requirement only. This is because the aim of the study is to assess the level of the transportation tariff after the removal of the value of the alternative flexibility used as a substitute for tolerance. Any additional storage booked or additional value derived by the shipper is separate from the transportation bundle provided by the TSO and therefore is not included in the analysis. GTS/21980/017.rep 23

25 8 Results: transportation tariffs cleansed for free tolerance Based on the research and analysis shown above, we have calculated results in the form of cleansed transportation tariffs for GTS, Fluxys, GRTgaz, GUD (BEB) and EGT (we have shown that free tolerance is not granted in the UK and therefore there is no valuation of alternative flexibility to subtract from the transportation tariff). The cleansed tariff is the transportation tariff minus the value of the free balancing tolerance. By subtracting this additional element provided by TSOs, the result should be more reflective of the actual tariff paid for transportation. Calculation method As outlined earlier in the report, for purposes of transparency, we have taken the 45 customer cases used in the annual transportation tariff comparison study conducted for GTS. The specific cases are made up of a combination of: 100 million m 3 p.a. at 8000, 5000 and 2500 hours load factor 10 million m 3 p.a. at 5000 and 2500 hours load factor 1 million m 3 p.a. at 2500 hours load factor For each of the cases above, we analyse several distance combinations, from 50 to 350 km on the high-pressure network (HTL), and 0 to 30 km on the regional network (RTL). These have been chosen as they are typical of the Netherlands and the GTS system, which is the key reference point for our annual study. The typical Dutch cases may or may not be representative of network usage within the systems of other TSOs. The aim of the study is to carry out a comparison between tariff levels under the current tariff system of GTS and the tariff levels which would result from the introduction into the Netherlands of the tariff systems adopted by other TSOs. The uncleansed transportation tariffs used in this report are simply the results of our annual study for the selected TSOs. For the postalised system of Fluxys there is a single tariff result for each case. It is not possible to travel 350 km on the Fluxys network, therefore these cases are excluded. The other TSOs included in this study utilise entry-exit network access systems. For these companies, there may be several different tariffs at a specific distance, or conversely, there may be no tariffs at a specific distance. We therefore use a specific methodology to obtain a high and a low case for our comparisons. We use this high and low case to reflect the range in these matrix tariffs. To ensure that tariffs exist at a given distance, we take a range around each of the 3 distances (on the HTL network our examples are 50, 200 and 350 km) to include all GTS/21980/017.rep 24

26 points 10 km above or below the distance we are analysing. For example, at 50 km we analyse the cluster of points between 40 and 60 km, as illustrated in Figure 13 below. We take the average of all the points in the 40 to 60 km range. Those points which lie above the average are used to calculate the high tariff, defined as the average of all the points above the mean. Those points which lie below the average value in the range are used to calculate a low tariff, defined as the average of all the points below the mean. Where a point has duplicates, that is points with the same tariff and the same distance, the duplicates are removed and only a single point included in the average calculations. This prevents weighting of points. This approach is more robust than simply taking the maximum and minimum tariff for a given distance or distance range, as it avoids the potential for extreme tariffs, which may be very high or very low and which lie outside the main cluster of tariffs at that distance. The uncleansed 2008 tariffs used in this report are shown in Figure 3. Figure 3: Transportation tariffs for the 45 cases for selected TSOs, /m 3 /h/y From the 45 cases, it is clear that there are six capacity levels for which we should calculate the applicable free tolerance. The capacity and tolerance calculations are shown in Table 4 below. We also include tolerance based on a temperature of -17 C for GTS, which is the only TSO to vary the tolerance allocation according to temperature. GTS/21980/017.rep 25

27 Table 4: Calculation of the six capacity levels and the applicable hourly and cumulative free tolerance GUD EGT GTS Fluxys GRTgaz Volume (million m 3 ) Load factor (hours) 8,000 5,000 5,000 2,500 2,500 2,500 Capacity (m 3 /h) 12,500 20,000 2,000 40,000 4, Hourly tolerance (m 3 /h) 1,250 2, , Cumulative tolerance (m 3 ) 25,000 40,000 4,000 80,000 8, Hourly tolerance (m 3 /h) 1,125 1, , Cumulative tolerance (m 3 ) 54,000 86,400 8, ,800 17,280 1,728 Hourly tolerance (m 3 /h) 2,813 4, , Cumulative tolerance (m 3 ) 22,500 36,000 3,600 72,000 7, Hourly tolerance (m 3 /h) 6,250 10,000 1,000 13,333 2, Cumulative tolerance (m 3 ) 25,000 40,000 4,000 80,000 8, Hourly tolerance (m 3 /h) 883 1, , Cumulative tolerance (m 3 ) 211, ,757 67, , ,051 13,405 GTS Hourly tolerance (m 3 /h) (cold) Cumulative tolerance (m 3 ) 1,000 1, , Source: ADL analysis As outlined in Section 7, the choice of alternative flexibility is based on the duration of the full cycle of storage use (injection hours plus withdrawal hours). We calculate this by dividing the cumulative tolerance (equivalent to working gas volume) by the hourly tolerance (equivalent to the injection or withdrawal rate in the theoretical storage) and multiplying by two. The cycle durations for the calculated capacities are shown in Table 5, leading us to select salt cavity tariffs as the input to the valuation of storage for GRTgaz and EGT, and the Röhrenspeicher for the others. Note that as mentioned previously, we use the salt cavity commercial tariffs for all the TSO calculations as these inputs are the most robust available to us. Therefore, when we state the selected alternative to be the Röhrenspeicher we are over-estimating the value of the alternative flexibility. GTS/21980/017.rep 26

28 Table 5: Cycle duration in hours and physical substitute for each TSO for the six capacity cases Capacity (m 3 /h) 12,500 20,000 2,000 40,000 4, Chosen substitute GUD Röhrenspeicher EGT Salt cavity GTS Röhrenspeicher Fluxys Röhrenspeicher GRTgaz Salt cavity GTS (cold) Röhrenspeicher Source: ADL analysis Using the data shown in Figure 2, which relates the cost of injection or withdrawal capacity to the number of hours of the full cycle, we have calculated a total cost of storage by multiplying the capacity by the relevant tariff for storage. This is because the storage tariff is dependent on the m 3 /h injection or withdrawal required for the storage facility, not the transportation capacity, so we cannot simply subtract one fee from the other. We then calculate the total transportation cost by multiplying the relevant transportation tariff by the transport capacity. This is because the transportation tariff is dependent on the m 3 /h transportation required, not the storage injection or withdrawal capacity, so again we cannot simply subtract one fee from the other. Subtracting the total storage cost from the total transportation cost provides the cleansed total cost; dividing by the transportation capacity provides the cleansed transportation tariff in /m 3 /h/y. For example: Transportation case Volume: 100 million m 3 Load factor: 8,000 hours Capacity: 12,500 m 3 /h/y Derived free tolerance Hourly tolerance: Cumulative tolerance: Cycle duration: 2,813 m 3 /h (injection/withdrawal capacity) 22,500 m 3 (WGV) 16 hours Röhrenspeicher tariff at 16 hours: /m 3 /h/y 2,813 m3/h * /m 3 /h/y = 140,625 (total storage cost) Transportation tariff, 50km HTL (min): /m 3 /h/y GTS/21980/017.rep 27

29 12,500 * /m 3 /h/y = 296,799 (total transportation cost) 296, ,625 = 156,174 ( cleansed total transportation cost) 156,174 / 12,500 m 3 /h/y= /m 3 /h/y ( cleansed transportation tariff) Presentation of results We have conducted the calculations for all the transportation tariff results for the 45 cases (shown in Figure 3): 1. Producing a result based on the commercial tariff as our Base scenario 2. Producing a result based on our Low scenario valuation of storage, using the commercial tariff minus 50% 3. Producing a result based on our High scenario valuation of storage, using the commercial tariff plus 50% We have chosen this method to illustrate the possible wide range of storage valuations that could be attributed to the free tolerance. As explained previously, this is intended to enhance the robustness of the results. GTS/21980/017.rep 28

30 Table 6: Example calculations illustrating the impact of the Low and High storage valuation scenarios, assuming 12,500 m 3 /h transportation capacity on the GUD system and a transportation tariff of /m 3 /h/y Scenario Base Low High Calculations 40 hr cycle = 20.5 /m 3 /h/y injection/ withdrawal 20.5 /m 3 /h/y * 1,250 m 3 /h injection/ withdrawal = 25, /m 3 /h/y * 12,500 m 3 /h/y transportation = 573, ,614-25,655 = 547, ,959 / 12,500 m 3 /h/y = /m 3 /h/y cleansed transport tariff 40 hr cycle = 10.3 /m 3 /h/y injection/ withdrawal 10.3 /m 3 /h/y * 1,250 m 3 /h injection/ withdrawal = 12, /m 3 /h/y * 12,500 m 3 /h/y transportation = 573, ,614-12,827 = 560, ,786 / 12,500 m 3 /h/y = /m 3 /h/y cleansed transport tariff 40 hr cycle = 30.8 /m 3 /h/y injection/ withdrawal 30.8 /m 3 /h/y * 1,250 m 3 /h injection/ withdrawal = 38, /m 3 /h/y * 12,500 m 3 /h/y transportation = 573, ,614-38,482 = 535, ,132 / 12,500 m 3 /h/y = /m 3 /h/y cleansed transport tariff The results are presented in the form of a traffic light diagram, which is the method for comparing the results of other companies to those of Gas Transport Services. A green light indicates that Gas Transport Services tariff is lower than that of the other TSO, a red light indicates that it is higher, and a yellow light indicates that the tariffs are similar to each other. As Gas Transport Services offers a range of tariffs at each distance (in common with several other companies) we have compared the range of tariffs offered by GTS with the range or single tariff offered by the other TSO. Where these ranges overlap, we conclude that the tariffs are similar and therefore the yellow traffic light is used. In Figure 4 we show four sets of traffic lights. The first is for the transportation tariffs before any subtraction of free tolerance; the second is the cleansed transportation tariffs using the Base scenario storage valuation; the third is the cleansed transportation tariffs using the Low scenario storage valuation, and the fourth is the GTS/21980/017.rep 29

31 cleansed transportation tariffs using the High scenario storage valuation. The comparisons are made for a normal temperature day in the Netherlands (i.e. 0 C or above). The results of the traffic lights are summarised in Table 7. Note that the 350 km cases for Belgium are excluded from these calculations as it is not possible to travel that distance on the Fluxys network. These cases are represented by blank cells in the diagrams. It can be seen that, for the Base scenario, while the proportion of green lights decreases compared to the uncleansed tariffs and the proportion of yellow and red lights increase, the changes are small and fewer than 5% of the traffic lights are red. The impact of the Low and High scenarios is minimal. For more than 66% of the cleansed tariff results, even when subtracting the high storage valuation, the GTS tariff is cheaper than that of the other TSOs. Table 7: Summary results of traffic light diagrams, normal temperature day Green lights Yellow lights Red lights Uncleansed 72% 27% 1% Cleansed Base scenario 67% 29% 4% Cleansed Low scenario 69% 28% 2% Cleansed High scenario 66% 28% 5% Source: ADL analysis, 165 data points We can also calculate a summary of the results considering all the input cases, regardless of whether there is an output result or not (i.e. 180 data points instead of 165, incorporating the blank cells shown in the diagrams). The results using this approach are similar. These are shown in Table 8. Table 8: Summary results of traffic light diagrams, normal temperature day including blank Green lights Yellow lights Red lights Blank cells Uncleansed 66% 25% 1% 8% Cleansed Base scenario 62% 27% 3% 8% Cleansed Low scenario 63% 26% 2% 8% Cleansed High scenario 61% 26% 5% 8% Source: ADL analysis, 180 data points GTS/21980/017.rep 30

32 Figure 4: Traffic light diagrams, normal temperature day GTS/21980/017.rep 31

33 Note: a distance of 350 km is not possible in Belgium, therefore no comparison is made for this distance, denoted in the diagrams by a blank cell GTS/21980/017.rep 32

34 We can also show the results on the basis of a cold day in the Netherlands (-17 C), as GTS reduces the amount of free tolerance granted to shippers under these conditions. We show the traffic light diagrams in Figure 5 and have summarised the results in Table 9 below. It can be seen that, for the Base scenario, while the proportion of green lights decreases compared to the uncleansed tariffs and the proportion of yellow lights increases, the proportion of red lights reaches only 7%. The High scenario produces 11% red lights, but the proportion of yellow lights remains similar in all scenarios. For more than 55% of the cleansed tariff results, even when subtracting the High storage valuation, the GTS tariff is cheaper than that of the other TSOs. Table 9: Summary results of traffic light diagrams, cold temperature day Green lights Yellow lights Red lights Uncleansed 72% 27% 1% Cleansed Base scenario 59% 34% 7% Cleansed Low scenario 63% 33% 4% Cleansed High scenario 55% 34% 11% Source: ADL analysis, 165 data points Again, for completeness we can also calculate a summary of the results considering all the input cases, regardless of whether there is an output result or not (i.e. 180 data points instead of 165, incorporating the blank cells shown in the diagrams). The results using this approach are similar. These are shown in Table 10. Table 10: Summary results of traffic light diagrams, normal temperature day including blank Green lights Yellow lights Red lights Blank cells Uncleansed 66% 25% 1% 8% Cleansed Base scenario 54% 31% 6% 8% Cleansed Low scenario 58% 30% 4% 8% Cleansed High scenario 51% 31% 10% 8% Source: ADL analysis, 180 data points GTS/21980/017.rep 33

35 Figure 5: Traffic light diagrams, cold temperature day GTS/21980/017.rep 34

36 Note: a distance of 350 km is not possible in Belgium, therefore no comparison is made for this distance, denoted in the diagrams by a blank cell GTS/21980/017.rep 35