Overview of the current regulatory framework. Berlin, 30 May 2018 Dr Robin Borrmann

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1 Overview of the current regulatory framework Berlin, Dr Robin Borrmann

2 Agenda Background to imbalance price surge in winter 2017/2018 Quo Vadis study CEER study on the Future Role of Gas (FROG)

3 Imbalance prices winter 2017/2018 Cold snap caused by polar vortex pushed daily imbalance prices to record levels Positive imbalance price [EUR/MWh] Negative imbalance price [Euro/MWh] Source: GASPOOL

4 Gas demand in GASPOOL market area (MWh/d) Two demand peaks driven by cold temperatures / / /2018

5 Temperatures across Europe February 2018 Degrees Celsius Source:

6 Power prices across Europe February 2018 EUR/MWh Source:

7 Gas-fired power generation January 2017 GWh Nearly windless and sunless period next to no renewable power generation Source:

8 Gas-fired power generation February 2018 GWh Gas-fired power generation output hardly affected by severe weather Source:

9 Situation in neighbouring countries Netherlands: Groningen field production dropped to lowest February level since production activities started in 60s, around a third down on February 2017 and 40% below five-year average Price for balancing transactions on 28/02/2018 for delivery period 09:00 to 10:00: EUR/MWh Norway: Norwegian exports to Europe hit four-year low Exports to Germany 20% below February 2017 Several outages of production and transportation facilities disrupted flows (mainly to UK) UK: At 05:00 on 1 March 2018, unplanned outage of LNG facility combined with extremely low temperatures led to National Grid issuing its first ever Gas Deficit Warning prompted by an estimated demand deficit of 48 bcm NBP within-day prices soared to levels not seen since 1997, with gas trading at 350p/th on 1 March 2018 Source: ArgusMedia, Bloomberg, ICIS Heren, OilPrice, Reuters

10 Agenda Background to imbalance price surge in winter 2017/2018 Quo Vadis study CEER study on the Future Role of Gas (FROG)

11 Quo Vadis study EU Commission has acknowledged that Third Energy Package has mostly been implemented and markets have evolved. They ve been pondering whether it is time to sit back and sip our margaritas. Against this background EY and REKK were commissioned to conduct the Quo Vadis study to look for answers. Key focus was on analysing whether the current rules deliver the intended results or whether fresh initiatives are needed to generate the economic welfare gains envisaged by the Commission. In the run-up to the study Commission had suggested that it might well lead to major changes to the Third Energy Package.

12 Quo Vadis scenarios Scenarios analysed in Quo Vadis study: Tariff reform: all of Europe to apply same entry tariff at border points and same exit tariff at exit points settlement between TSOs to take place via inter-tso compensation mechanism Market mergers: cross-border trading zones to be created as envisaged in CEER s Gas Target Model Combined capacity-commodity release programme: producers/importers to be obliged to sell at least 50% of their long-term supply contract volumes for imports to EU on nearest VTP Strategic partnership between EU and Russia in upstream sector

13 Tariff reform scenario: As long-term capacity contracts come to an end, segmentation of European gas market may increase due to greater location spreads than today Harmonised entry tariffs are estimated to deliver an annual economic benefit of EUR 5 billion assuming an environment in which oil prices are high, LNG capacity is short and Russia supplies only long-term contract volumes through Ukraine

14 Market merger scenario Market mergers: Expected to deliver only moderate welfare improvements and only where wholesale price differences are present before the merger High costs required to expand infrastructure for delivery of merger projects may lead to tariff increases on borders of the merged markets Source: Quo vadis EU gas market regulatory framework Study on a Gas Market Design for Europe, 2018, p149

15 Impact of market mergers on tariff levels Current situation After merger Mergers would create larger markets within EU but at the cost of higher tariffs on their borders that might act as a barrier separating these markets Source: Quo vadis EU gas market regulatory framework Study on a Gas Market Design for Europe, 2018, p154/155

16 Combined capacity-commodity release programme: Approach preferred by advisers Expected to deliver annual benefit of EUR 1.5 to 3 billion Scenario would bring improvements to high-price markets with high levels of market concentration without adversely affecting neighbouring markets (as opposed to market mergers, see above) Would only require amendments to the CAM NC, which makes it relatively easy to implement from the authors point of view But closer analysis needed in any case Strategic partnership: Substantial welfare gains likely but overall a highly hypothetical scenario

17 Conclusions In early 2017 Quo Vadis study was proclaimed to be a potentially gamechanging analysis of the European gas market. As the work progressed the statistical models applied came increasingly under fire. Study was published in February 2018 but Commission is no longer making any loud noises about translating it into action.

18 Agenda Background to imbalance price surge in winter 2017/2018 Quo Vadis study CEER study on the Future Role of Gas (FROG)

19 Context and background In March 2018 CEER (Council of European Energy Regulators) published a study on the future role of natural gas from a regulatory perspective. Study provides an overview of the EU s political aims and initiatives and puts them in the context of recent and foreseeable developments relating to (natural) gas. Study analyses three scenarios to 2040 based on the following sources: ENTSOG s Ten-Year Network Development Plan World Energy Outlook 2016 EU Reference Scenario Study is to inform regulatory measures in both commodity and infrastructure areas.

20 Overview of the 2040 scenarios analysed by study ~ 5,300 TWh/a ~ 4,500 TWh/a ~ 3,500 TWh/a Source: DNV-GL: FUTURE ROLE OF GAS FROM A REGULATORY PERSPECTIVE - OUTLOOK AND RECOMMENDATIONS, draft paper, September 2017

21 Renewable gases New types of gas (biogas, hydrogen, biomethane) are seen as promising candidates but developments are at an early stage so future evolution is hard to predict at present. Hydrogen production and supply seen as competitive market no regulatory measures needed. But transportation of renewable gases to be regulated, e.g. changes to calorific value specifications but also network codes (TPA, capacity market, balancing...). Prices to be set at level that encourages demand to facilitate further development (tax incentives, guarantees to secure funding for pilot projects etc.). Government funds for promotion of pilot facilities etc. also considered a suitable tool.

22 Findings Natural gas likely to retain a competitive position in heating sector and improve its competitive position in transport. Natural gas to play key role in power generation as backup to fluctuating production output of intermittent renewables Natural gas has potential to contribute substantially to decarbonisation and to help keep the cost of avoiding carbon emissions as low as possible.

23 Thank you for your attention. Any questions?