Gasunie response to the ACER Discussion Paper. A Bridge to December N.V. Nederlandse Gasunie Councourslaan Groningen

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1 Gasunie response to the ACER Discussion Paper A Bridge to December 2013 N.V. Nederlandse Gasunie Councourslaan Groningen

2 About Gasunie Gasunie is a European gas infrastructure company. We provide the transport of natural gas and green gas in the Netherlands and the Northern part of Germany. All our activities are geared to facilitating the market, both the industrial and the domestic gas markets. In the Netherlands, Germany and further afield. This varies from providing gas transport to constructing new infrastructure And from participating in new projects to developing new services. In all our activities we follow trends and requirements in the market closely, as our aim is to be able to offer our customers the best standard of service possible. Gasunie has two subsidiaries that manage the gas transmission grid: Gasunie Deutschland in Germany and Gasunie Transport Services (GTS) in the Netherlands. We also provide the market with gas storage facilities (Gasunie Zuidwending), the pipeline to the United Kingdom (BBL) and the LNG terminal Gate at Maasvlakte. In addition, we facilitate and stimulate the green gas market through our subsidiary Vertogas, through which producers and traders in green gas can certify their green gas.

3 General Gasunie welcomes this opportunity to respond to the ACER Discussion Paper on Energy Regulation: A Bridge to 2025 for Gas. This discussion paper has been released while the review of the Gas Target Model has also started. Gasunie supports the need for a more inclusive overview of the energy market before updating the Gas Target Model. ACER argues that is has chosen a time horizon over a decade ahead which is not too far to permit greater certainty in assessing the more significant influences that might occur. Given the fact that investments in infrastructure have long lead times and long depreciation periods; from an investor s perspective stable and predictable regulatory conditions are needed over a longer period of time. Whereas the Third Energy Package has brought fundamental changes to the gas market, further changes are expected shortly as a result of the development and implementation of the European network codes. It would seem a missed opportunity if the Gas Target Model is reviewed without benefitting from the experience gained with the new market rules as a result of the (early) implementation of network codes such as on congestion management procedures, capacity allocation mechanisms, balancing, interoperability and tariffs. Strategic context ACER presumes a continued decline of gas demand in Europe. Whereas currently demand has been declining for several years, it is as yet unclear if this trend will continue. Various institutions and organizations have developed roadmaps with projected future demand for gas. There doesn t seem to be consensus on future gas demand, and much will depend on the energy and climate policy framework post Furthermore, investments in European gas infrastructure are triggered by capacity requirements related to daily demand rather than annual demand. ACER seems to take the position that the current buyers-market will continue to be in place. A more cautious approach in this respect seems appropriate. The European market might converge again to a sellers-market. The regulatory framework for which ACER is responsible should foster a wellfunctioning internal market, independent from demand and supply scenarios. A regulatory framework developed on the basis of a declining gas market is illsuited for a gas market which still requires substantial investments in new supply routes and interconnections. The European gas market is still geographically fragmented. The dynamic and state of market integration of the gas market in North-western Europe is substantially different from Central and Eastern Europe. This has implications on various aspects; investments in certain Member States might be needed to meet expected demand growth or security of supply, while in other Member States investments are needed to accommodate new import routes to substitute declining domestic production or enhance market integration. Reliance on imports through pipelines also creates a different dynamic than where gas is also imported through LNG. Shale gas production in the United States has a big impact on the global gas market and is also impacting the European gas market. It is unclear if unconventional gas resources in Europe will be developed. But even without the

4 development of unconventional gas resources in Europe there are sufficient gas reserves available to meet demand. In any conceivable scenario the share of renewable intermittent electricity generation will increase. This creates challenges, mainly for balancing and guaranteeing security of supply of the electricity networks. Gas infrastructure and gas fired power plants can contribute in meeting these challenges. To ensure that gas can play its role in reducing GHG emissions a review of European energy and climate policy is urgently needed. Current ETS prices give no incentive for investments in efficient gas-fired power plants. On the contrary they have led to increased use of coal-fired power generation, offsetting the reduction of GHG emissions through investments in renewable electricity generation. The disparity between GHG emission reduction costs inside ETS (around 5/t) and outside the ETS through for example subsidies (up to 500/t) should be addressed. A more integrated evaluation of planned investments in gas and electricity infrastructure seems appropriate and could lead to more optimal solutions for transporting energy through the internal market. Competitive and integrating markets A recent OIES study concluded that Europe already has substantial gas price convergence amongst the major hubs. This conclusion also seems to be underwritten by the recently released ACER Market Monitoring The conclusions from a recent Booz & Co. study also confirm the considerable progress which has been made in enabling the internal energy market. The conclusions in this Bridge to 2025 paper on the progress made so far, seem therefore not to be supported by other recent studies. The results of the Booz & Co. study mentioned in this paper on benefits of further market integration estimated at 30 billion per year seem to be rather optimistic. A Study on merging Gaspool and NCG in Germany came to a different conclusion. In that study the benefits of an integrated market did not weigh up to the projected investment costs. Whereas benefits can certainly be gained through further market integration, and cross-border projects should always be taken into account to realize efficient solutions to transport challenges, projected benefits need a more in-depth, case-by-case reflection. In fact, the amount of 30 billion per year estimated by the Booz & Co. study seems based mainly on a shift from oil-linked gas prices to hub-based prices. In the oligopolistic gas supply structure of the EU one could wonder if these benefits would indeed materialise to such extent (and at the expense of the producers involved). ACER applies the CEER criteria for competition, which imply that many of Europe s current entry/exit zones would be required to merge to meet the criteria. It should be noted that the adequacy and appropriateness of the criteria were not established, they should therefore be regarded as indicators only. Furthermore when mergers of zones involves crossing national borders, this can even cause additional problems resulting from different national legislations (such as fiscal, financial or regulatory matters).

5 Diversification of supply and improved access to markets Measures such as the CAM and CMP network codes were aimed at ensuring optimal use of and access to the existing infrastructure. Moreover NRA s take efficiency into account when approving new tariffs and investments. It seems therefore that measures have now been put in place to address concerns of efficient use of existing and new infrastructure. It is certainly too early to conclude if further measures are needed. The regulatory framework should enable long term transmission capacity contracts given their essential role in ensuring investments in new gas infrastructure. Furthermore the necessity of a stable and adequate investment climate, providing a fair remuneration of assets cannot be overemphasized. The market can provide the best investments signals. Top-down centralized investments planning could lead to higher societal costs. Some investments which are not based on direct market demand such as for security of supply might need targeted support to ensure implementation. The TEN-E infrastructure regulation and the Connecting Europe Facility (CEF) already provide measures for the implementation of such projects. However, it should be ensured that these projects do not hinder or jeopardize the value of the existing investments. Integrating market zones Merging zones may enhance liquidity but there are important factors which should be taken into account, such as the need to redistribute tariffs among the remaining entry and exit points which reduces cost reflectivity. A recent study by KEMA on behalf of the European Commission also indicated that merging zones is not so straightforward as expected. Not every virtual trading point needs to be deep and liquid. It would be sufficient that some like TTF and NBP are, and others trade on a basis differential. The recent OIES study confirms that several hubs covering the vast majority of gas demand in Europe are now well aligned. Contribution to sustainability Gas infrastructure can have a significant role to support an electricity system which is increasingly reliant on generation from intermittent renewable sources. The interactions between the gas and electricity markets should however first be better studied before introducing new measures. Misalignment between the gas and electricity market might be caused by too restrictive rules enshrined in the regulatory framework, over standardization of products or imposed by infrastructure operators. The balancing regime in the Netherlands gives maximal freedom to market parties without the risk of high fines as a result of imbalance. Thereby the costs and risks for market parties, including gas-fired generators, are optimally contained.