Development of Gas Hubs in Europe

Transcription

1 Development of Gas Hubs in Europe Caterina Miriello, Michele Polo IEFE - Centre for Research on Energy and Environmental Economics and Policy Department of Economics Bocconi University May 28, 2014

2 Outline of the talk Liberalization and wholesale gas markets: an analytical framework The regulatory challenges A three phases process: balancing, second sourcing and risk management A comparative assessment: UK, the Netherlands, Germany, Italy

3 Balancing in a liberalized market We argue that a wholesale gas market can emerge, after liberalization, with a precise sequence of steps. Upstream (import) and downstream (retail) activities are run by contracts. In each contract, the amount of gas to be delivered and injected into the gas system is initially set according to the expectations on the demand of the buyers. Actual supply and demand, however, are hit by shocks that may make the contracted (injected) and actual (withdrawn) quantities different, creating imbalances. Imbalances have a commercial (sell more/less gas than expected) and a physical dimension (more/less injections than withdrawals). Physical imbalances threaten the integrity of the system, and they are influenced by the way the commercial imbalance is cleared.

4 Balancing in a liberalized market Some of the demand shocks (of opposite sign) can be adjusted within each trader s portfolio of contracts, with no need to deal with other operators The larger the portfolio of contracts, the larger the share of internal compensations that can be cleared, and the lower the need to revert to trade with external operators. In the pre-liberalization world, one large operator dealing with (almost) all final demand: only the aggregate imbalances of the system need to be adjusted through deals with external agents (producers, export to other countries, storage) In a liberalized market, the size of the individual portfolios is reduced, and more imbalances need to be dealt with through trade with other operators

5 Balancing in a liberalized market Then, clearing individual imbalances creates the scope for a wholesale market. Many different arrangements can be set up, depending on the relative role of individual operators and the TSO: Individual operators can directly trade their imbalances among themselves; The TSO can act as a market maker buying or selling individual imbalances; The TSO can organize a centralized mechanism for trading individual imbalances; The general goal is to create a mechanism to first exploit all the possibilities to clear individual imbalances by compensating them into the gas system. The clearing of commercial imbalances this way allows to minimize the physical imbalances (avoid that, in order to clear its commercial imbalance, an operator increases the physical imbalance into the system)

6 Balancing in a liberalized market The more the upstream and downstream market are fragmented by liberalization: the smaller the size of individual portfolios of contracts of the operators the smaller the share of shocks that can be adjusted within individual portfolios the larger the share of shocks that can be cleared through trading among operators with net imbalances of opposite sign the more liquid a wholesale gas market. Those aggregate imbalances that cannot be cleared by trading individual ones need to be adjusted differently, both commercially and physically (line-pack, storage, export/import, production swings)

7 Balancing in a liberalized market Shocks 1 operator 2 operators 4 operators I.A. N.I. I.A. N.I. I.A. N.I. (-ε/4, -ε/4, -ε/4, -ε/4) 0 -ε 0,0 -ε/2, -ε/2 0,0,0,0 -ε/4, -ε/4, -ε/4, -ε/4 (-ε/4, -ε/4, -ε/4, ε/4) (-ε/4, -ε/4, ε/4, -ε/4) (-ε/4, ε/4, -ε/4, -ε/4) (ε/4, -ε/4, -ε/4, -ε/4) ε/2 -ε/2 0, ε /2 0, ε/2 ε/2, 0 ε/2, 0 -ε/2, 0 -ε/2, 0 0, -ε/2 0, -ε/2 0,0,0,0 0,0,0,0 0,0,0,0 0,0,0,0 -ε/4, -ε/4, -ε/4, ε/4 -ε/4, -ε/4, ε/4, -ε/4 -ε/4, ε/4, -ε/4, -ε/4 ε/4, -ε/4, -ε/4, -ε/4 (-ε/4, -ε/4, ε/4, ε/4) (-ε/4, ε/4, -ε/4, ε/4) (-ε/4,ε/4, ε/4,- ε/4) (ε/4, ε/4, -ε/4,- ε/4) (ε/4, -ε/4, ε/4, -ε/4) (ε/4, -ε/4, -ε/4, ε/4) ε 0 0, 0 ε/2, ε/2 ε/2, ε/2 0, 0 ε/2, ε/2 ε/2, ε/2 -ε/2, ε /2 0, 0 0, 0 ε/2, -ε/2 0, 0 0,0 0,0,0,0 0,0,0,0 0,0,0,0 0,0,0,0 0,0,0,0 0,0,0,0 -ε/4, -ε/4, ε/4, ε/4 -ε/4, ε/4, -ε/4, ε/4 -ε/4,ε/4, ε/4,- ε/4 ε/4, ε/4, -ε/4, -ε/4 ε/4, -ε/4, ε/4, -ε/4 ε/4, -ε/4, -ε/4, ε/4 (-ε/4, ε/4, ε/4, ε/4) (ε/4,-ε/4, ε/4, ε/4) (ε/4, ε/4, -ε/4, ε/4) (ε/4, ε/4, ε/4, -ε/4) ε/2 ε/2 ε /2, 0 ε/2, 0 0, ε/2 0, ε/2 0, ε/2 0, ε/2 ε/2, 0 ε/2, 0 0,0,0,0 0,0,0,0 0,0,0,0 0,0,0,0 -ε/4, ε/4, ε/4, ε/4 ε/4,-ε/4, ε/4, ε/4 ε/4, ε/4, -ε/4, ε/4 ε/4, ε/4, ε/4, -ε/4 (ε/4, ε/4, ε/4, ε/4) 0 ε 0 ε 0,0,0,0 ε/4, ε/4, ε/4, ε/4 I.A. Internal adjustment of shocks within each portfolio N.I. Net imbalance of each portfolio after internal adjustments Highlighted areas: trade opportunities between operators to clear the net imbalances

8 Designing a wholesale gas market The creation of a wholesale gas market requires to carefully design several elements: The choice of a transmission system model to allow trading gas provisions with entry-exit patterns different from the original ones >> EC recommends an entry-exit transmission system model The design of balancing rules to incentivize the operators to directly clear their imbalances >> EC recommends market-based mechanisms The provision of information to market participants to ease the direct clearance of imbalances >> EC recommends fundamental transparency rules.

9 The evolution of wholesale gas markets From the previous arguments we can expect the following pattern in the evolution of wholesale gas markets: 1. Balancing: wholesale trade is driven by deals to clear individual imbalances, according to the rules and incentives defined by regulation; traded volumes increase with the fragmentation of the market and with the proper design of market rules 2. Second sourcing: increased liquidity makes the market price more reflective of the underline conditions, and a better signal for trade aimed at providing gas as an alternative to long term contracts 3. Risk management: price variability driven by market fundamentals requires financial products to hedge risks

10 Predictions Prediction 1: The first phase in the development of a wholesale gas market entails balancing as the primary objective of traders, while a more mature phase entails gas provision as a second sourcing in the wholesale market. These phases tend to develop in each national gas system. Prediction 2: An entry-exit model, a market based balancing regimes and rules for fundamental transparency are the more favorable market design for the development of a wholesale market for balancing needs. Prediction 3: The wider the virtual trading area within a national gas system, the more rapid and effective the development of wholesale gas markets Prediction 4: Market liquidity increases more rapidly in countries endowed with significant local gas production. Prediction 5: Transactions of financial instruments to hedge gas price risk, the third phase of the development, concentrate in a small number of market venues.

11 Indicators Characteristics Indicators Formulation Production Self-sufficiency index SSI = Production/Total Consumption Balancing Rules European Market Integration Years since market-based balancing. Integrated market area within countries. No barriers to entry for operators (e.g. quality conversion) Transparency rules Price convergence. Interconnections with other markets. Qualitative assessment. Difference between price of country i and price at reference hub. Liquidity Churn ratios, traded volumes Net Churn Ratio = Traded Volumes/Physical Deliveries Gross Churn Ratio = Traded Volumes/Total Consumption Bid-Ask spread

12 Data Data collected from a number of sources. Data on volumes: Where available, data published by TSOs or hubs operators. Data on prices: Bloomberg database; ICE Endex; EEX. Data on consumption, production, import, export: IEA, Eurostat.

13 Indicators: production 200% 180% Self-sufficiency index Germany 160% 140% 120% Italy 100% 80% Netherlands 60% 40% 20% United Kingdom 0%

14 Regulation: UK First EU country to liberalize gas market. 90s: creation of Flexibility mechanism for balancing, heavily relying on the physical flexibility tools available. 1999: New Gas Trading Arrangements (NGTA): more reliance on marketbased tools for balancing, in order to improve price signals and to reduce the cost of balancing. Operators have incentives to clear their positions, with the TSO (National Grid) balancing only residually the system at a price related to the System Average Price (SAP). The price set on the OCM is used as a reference for the SAP; subsequently, the System Marginal Buy Price (SMBP) and the System Marginal Sell Price (SMSP) are computed. The main market instrument to acquire the resources for balancing is the On-the-day Commodity Market (OCM).

15 Regulation: the Netherlands 2004: GTS (Gas Transport Services ) introduced an entry-exit capacity system and the virtual trading point TTF. 2005: ownership unbundling of Gasunie into GasTerra, as trading company, and Gasunie as transportation company : rules to improve transparency, quality conversion and balancing regime. 2011: Nieuw marktmodel introduced. TTF becomes the central trading point for all natural gas in the Dutch transmission system.

16 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Indicators: traded volumes 160 Traded volumes at NBP and TTF TTF NBP TTF trend NBP trend

17 Regulation: Germany 2002: creation of the Bunde-Oude hub on the Dutch/German border. 2005: Energiewirtschaftsgesetz (EWG), entry-exit system; 19 entry-exit zones, called Marktgebiete. 2008: reduction of the zones to : Gas Network Access Ordinance (GasNZV) required TSOs to reduce the market areas for L-gas to one and for H-gas to two by : Further steps into balancing market reform.

18 Indicators: traded volumes Reduction of market areas from 12 to 3 30 Volumes Traded in Germany Volumes Traded in bcm Trend

19 Indicators: traded volumes 30 Traded volumes of gas (in bcm) TOTAL NCG GP

20 Regulation: Italy 2006: creation of the PSV hub. 2010: creation of the P-GAS, in order to exchange quotas of imported gas. 2011: creation of the PB-GAS for balancing purposes (similar to old UK flexibility mechanism). 2014: enlargement of the flexibility tools allowed for balancing.

21 Indicators: traded volumes Number of traders Start of the first gas exchange Volumes traded at PSV Creation of PBgas Auctions on European pipelines (e.g. TAG)

22 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Indicators: traded volumes 10 Traded volumes at PSV Traded Volumes Trend

23 Indicators: price convergence (1) 4.00 Auctions on European pipelines (e.g. TAG) Reference prices ( ct/kwh) APX TTF DAM All-Day Index Daily Reference Price Natural Gas NCG Daily Reference Price Natural Gas GASPOOL Reference price at PB-Gas

24 Indicators: price convergence(2) 3.5 Prices at European hubs APX TTF DAM All-Day Index APX ZTP Day- Ahead Index Daily Reference Price Natural Gas GASPOOL Daily Reference Price Natural Gas NCG ICE Endex OCM Market PB-Gas Reference price

25 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Indicators: liquidity 40 Churn ratio comparison TTF NBP NCG Gaspool PSV

26 Indicators: liquidity 4.5 Churn ratio comparison (w/o NBP and TTF) NCG Gaspool PSV

27 Indicators: liquidity 20% Relative Bid-Ask Quote 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% NBP TTF NCG

28 Jul 2011 Aug 2011 Sep 2011 Oct 2011 Nov 2011 Dec 2011 Jan 2012 Feb 2012 Mar 2012 Apr 2012 May 2012 Jun 2012 Jul 2012 Aug 2012 Sep 2012 Oct 2012 Nov 2012 Dec 2012 Jan 2013 Feb 2013 Mar 2013 Apr 2013 May 2013 Jun 2013 Jul 2013 Aug 2013 Sep 2013 Oct 2013 Nov 2013 Dec 2013 Indicators: liquidity 9% Relative Bid-Ask Quote - PSV 8% 7% 6% 5% 4% 3% 2% 1% 0%

29 January 3, 2011 January 24, 2011 February 14, 2011 March 7, 2011 March 28, 2011 April 18, 2011 May 10, 2011 May 31, 2011 June 21, 2011 July 12, 2011 August 2, 2011 August 23, 2011 September 13, 2011 October 4, 2011 October 25, 2011 November 15, 2011 December 6, 2011 December 28, 2011 January 19, 2012 February 9, 2012 March 1, 2012 March 22, 2012 April 13, 2012 May 4, 2012 May 25, 2012 June 15, 2012 July 6, 2012 July 27, 2012 August 17, 2012 September 7, 2012 September 28, 2012 October 19, 2012 November 9, 2012 November 30, 2012 December 21, 2012 January 15, 2013 February 5, 2013 February 26, 2013 March 19, 2013 April 10, 2013 Indicators: financial market Contracts exchanged (ICE Monthly Futures, num of contracts) NBP TTF

30 Conclusions Wholesale gas trading consequence of market liberalization. Natural endowments matter. Appropriate rules may help enhancing market liquidity: Adoption of an entry/exit system; Transparency; Adoption of a market-based balancing system e.g. Netherlands; Reduction of market areas e.g. Germany; Flexibility instruments available e.g. Italy; Instruments for hedging e.g. U.K.

31 Thank you.

32 Back-up slides

33 Jan 2010 Apr 2010 Jul 2010 Oct 2010 Jan 2011 Apr 2011 Jul 2011 Oct 2011 Jan 2012 Apr 2012 Jul 2012 Oct 2012 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Jan 2010 Apr 2010 Jul 2010 Oct 2010 Jan 2011 Apr 2011 Jul 2011 Oct 2011 Jan 2012 Apr 2012 Jul 2012 Oct 2012 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Jul 2011 Sep 2011 Nov 2011 Jan 2012 Mar 2012 May 2012 Jul 2012 Sep 2012 Nov 2012 Jan 2013 Mar 2013 May 2013 Jul 2013 Sep 2013 Nov 2013 Jan 2010 Mar 2010 May 2010 Jul 2010 Sep 2010 Nov 2010 Jan 2011 Mar 2011 May 2011 Jul 2011 Sep 2011 Nov 2011 Jan 2012 Mar 2012 May 2012 Jul 2012 Sep 2012 Nov 2012 Jan 2013 Mar 2013 May 2013 Jul 2013 Sep 2013 Indicators: liquidity Relative Bid-Ask Quote - PSV Relative Bid-Ask Quote - NCG 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 20% 15% 10% 5% 0% 12% Relative Bid-Ask Quote - TTF 16% 14% Relative Bid-Ask Quote - NBP 10% 12% 8% 10% 6% 4% 8% 6% 4% 2% 2% 0% 0%

34 Jan 2010 Apr 2010 Jul 2010 Oct 2010 Jan 2011 Apr 2011 Jul 2011 Oct 2011 Jan 2012 Apr 2012 Jul 2012 Oct 2012 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Jan 2010 Apr 2010 Jul 2010 Oct 2010 Jan 2011 Apr 2011 Jul 2011 Oct 2011 Jan 2012 Apr 2012 Jul 2012 Oct 2012 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Indicators: liquidity 12% 10% Relative Bid-Ask Quote - TTF 16% 14% 12% Relative Bid-Ask Quote - NBP 8% 10% 6% 8% 4% 2% 6% 4% 2% 0% 0%

35 Indicators: liquidity 20% Relative Bid-Ask Quote - NCG 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%